Document ID: SEC-2017-1598-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Bats BZX Exchange, Inc.
Posted Date: 2017-09-27T04:00Z

[Federal Register Volume 82, Number 186 (Wednesday, September 27, 2017)]
[Notices]
[Pages 45103-45106]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-20625]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81671; File No. SR-BatsBZX-2017-54]

Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change To List and Trade Shares of the 
iShares Inflation Hedged Corporate Bond ETF, a Series of the iShares 
U.S. ETF Trust, Under Rule 14.11(i), Managed Fund Shares

September 21, 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 September 7, 2017, Bats BZX Exchange, Inc. (``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 
iShares Inflation Hedged Corporate Bond ETF (the ``Fund''), a series of 
the iShares U.S. 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 seeks to mitigate the inflation risk of a portfolio 
composed of U.S. dollar-denominated investment-grade corporate bonds 
either through holding such bonds or through holding exchange-traded 
funds that hold such bonds, as further described below. The Exchange 
submits this proposal in order to allow the Fund to hold Inflation 
Hedging Instruments, as defined below, in a manner that may not comply 
with Rule 14.11(i)(4)(C)(iv)(a),\4\ Rule 14.11(i)(4)(C)(iv)(b),\5\ and/
or Rule

[[Page 45104]]

14.11(i)(4)(C)(v),\6\ as further described below. Otherwise, the Fund 
will comply with all other listing requirements on an initial and 
continued listing basis under Rule 14.11(i).
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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\ Rule 14.11(i)(4)(C)(iv)(a) provides that ``there shall be no 
limitation to the percentage of the portfolio invested in such 
holdings; provided, however, that in the aggregate, at least 90% of 
the weight of such holdings invested in futures, exchange-traded 
options, and listed swaps shall, on both an initial and continuing 
basis, consist of futures, options, and swaps for which the Exchange 
may obtain information via the Intermarket Surveillance Group 
(``ISG'') from other members or affiliates of the ISG or for which 
the principal market is a market with which the Exchange has a 
comprehensive surveillance sharing agreement, calculated using the 
aggregate gross notional value of such holdings.'' The Exchange is 
proposing that the Fund be exempt from this requirement only as it 
relates to the Fund's holdings in certain credit default swaps and 
Inflation Swaps, as further described below.
    \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).'' The 
Exchange is proposing that the Fund be exempt only from the 
requirement of Rule 14.11(i)(4)(C)(iv)(b) that prevents the 
aggregate gross notional value of listed derivatives based on any 
single underlying reference asset from exceeding 30% of the weight 
of the portfolio (including gross notional exposures). The Exchange 
is proposing that the Fund be exempt from this requirement only as 
it relates to the Fund's holdings in listed derivatives, which 
include U.S. Treasury futures, credit default swaps, and certain 
Inflation Swaps, as further described below. The Fund will meet the 
requirement 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).
    \6\ Rule 14.11(i)(4)(C)(v) provides that ``the portfolio may, on 
both an initial and continuing basis, 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 the aggregate gross notional value of OTC Derivatives shall 
not exceed 20% of the weight of the portfolio (including gross 
notional exposures).'' The Exchange is proposing that the Fund be 
exempt from this requirement only as it relates to the Fund's 
holdings in OTC derivatives, which include total return swaps and 
certain inflation swaps, as further described below.
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    The Shares will be offered by the Trust, which was established as a 
Delaware statutory trust on June 21, 2011. The Trust is registered with 
the Commission as an open-end investment company and has filed a 
registration statement on behalf of the Fund on Form N-1A 
(``Registration Statement'') with the Commission.\7\
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    \7\ See Registration Statement on Form N-1A for the Trust, dated 
April 6, 2017 (File Nos. 333-179904 and 811-22649). The descriptions 
of the Fund and the Shares contained herein are based, in part, on 
information in the Registration Statement. The Commission has issued 
an order granting certain exemptive relief to the Company under the 
Investment Company Act of 1940 (15 U.S.C. 80a-1) (``1940 Act'') (the 
``Exemptive Order''). See Investment Company Act Release No. 29571 
(January 24, 2011) (File No. 812-13601).
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    The Fund intends to qualify each year as a regulated investment 
company under Subchapter M of the Internal Revenue Code of 1986, as 
amended.
iShares Inflation Hedged Corporate Bond ETF
    According to the Registration Statement, the Fund will be an 
actively managed exchange-traded fund that will seek to mitigate the 
inflation risk of a portfolio composed of U.S. dollar-denominated 
investment-grade corporate bonds. The Fund seeks to achieve its 
investment objective by investing, under Normal Market Conditions,\8\ 
at least 80% of its net assets in the iShares iBoxx $ Investment Grade 
Corporate Bond ETF (the ``Underlying Fund''), U.S. dollar-denominated 
investment-grade corporate bonds, in one or more other underlying ETFs 
\9\ that principally invest in investment-grade corporate bonds, and in 
Inflation Hedging Instruments, as defined below. The Fund will gain 
exposure to U.S. dollar-denominated investment-grade corporate bonds 
primarily through investing in the Underlying Fund. As an alternative, 
the Fund may gain such exposure by investing in U.S. dollar-denominated 
investment-grade corporate bonds or through other exchange-traded funds 
that are listed on a national securities exchange that principally 
invest in investment-grade corporate bonds. The Fund will attempt to 
mitigate the inflation risk of the Fund's exposure to U.S. dollar-
denominated investment-grade corporate bonds primarily through the use 
of either OTC or listed inflation swaps (i.e., contracts in which the 
Fund will make fixed-rate payments based on notional amount while 
receiving floating-rate payments determined from an inflation index) 
(``Inflation Swaps''),\10\ which are managed on an active basis. As an 
alternative, the Fund may also attempt to mitigate the inflation risk 
of the underlying securities or the Underlying Fund through investing 
in other products designed to transfer inflation risk from one party to 
another, including but not limited to Treasury Inflation-Protected 
Securities (``TIPS''), total return swaps,\11\ credit default 
swaps,\12\ and U.S. Treasury futures \13\ (collectively with Inflation 
Swaps, ``Inflation Hedging Instruments''). The Exchange is proposing to 
allow the Fund to hold up to 50% of the weight of its portfolio 
(including gross notional exposure) in Inflation Hedging Instruments, 
collectively, in a manner that may not comply with Rules 
14.11(i)(4)(C)(iv)(a),\14\ 14.11(i)(4)(C)(iv)(b),\15\ and/or 
14.11(i)(4)(C)(v),\16\ as discussed above.
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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\ For purposes of this proposal, the term ETF includes 
Portfolio Depositary Receipts, Index Fund Shares, and Managed Fund 
Shares as defined in Rule 14.11(b), (c), and (i), respectively, and 
their equivalents on other national securities exchanges.
    \10\ See supra notes 4, 5, and 6. All Inflation Swaps held by 
the Fund will be listed and/or centrally cleared in order to reduce 
counterparty risk.
    \11\ See supra note 6. The Fund will attempt to limit 
counterparty risk in non-cleared swap contracts by entering into 
such contracts only with counterparties the Adviser believes are 
creditworthy and by limiting the Fund's exposure to each 
counterparty. The Adviser will monitor the creditworthiness of each 
counterparty and the Fund's exposure to each counterparty on an 
ongoing basis.
    \12\ See supra notes 4 and 5. Credit default swaps held by the 
Fund will be traded on a U.S. Swap Execution Facility registered 
with the Commodity Futures Trading Commission.
    \13\ See supra note 5.
    \14\ See supra note 4.
    \15\ See supra note 5.
    \16\ See supra note 6.
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    The Fund's investments, including derivatives, will be consistent 
with the Fund's investment objective and will not be used to enhance 
leverage (although certain derivatives and other investments may result 
in leverage). That is, while the Fund will be permitted to borrow as 
permitted under the 1940 Act, the Fund's investments will not be used 
to seek performance that is the multiple or inverse multiple (i.e., 2Xs 
and 3Xs) of the Fund's primary broad-based securities benchmark index 
(as defined in Form N-1A). The Fund will only use those derivatives 
included in the defined term Inflation Hedging Instruments. The Fund's 
use of derivative instruments will be collateralized. As noted above, 
the Fund will only use derivative instruments in order to attempt to 
mitigate the inflation risk of the U.S. dollar-denominated investment-
grade corporate bonds.
    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.
Surveillance
    The Exchange represents that, except for the exceptions to BZX Rule 
14.11(i)(4)(C) described above, the Fund's proposed investments will 
satisfy, on an initial and continued listing basis, all of the generic 
listing standards under BZX Rule 14.11(i)(4)(C) and all other 
applicable requirements for Managed Fund Shares under Rule 14.11(i). 
The Trust is required to comply with Rule 10A-3 under the Act for the 
initial and continued listing of the Shares of the Fund. In addition, 
the Exchange represents that the Shares of the Fund will comply with 
all other requirements applicable to Managed Fund Shares including, but 
not limited to, requirements relating to the dissemination of key 
information such as the Disclosed Portfolio, Net Asset Value, and the 
Intraday Indicative Value, rules governing the trading of equity 
securities, trading hours, trading halts, surveillance, and the 
information circular, as set forth in Exchange rules applicable to 
Managed Fund Shares and the orders approving such rules. At least 
100,000 Shares will be outstanding upon the commencement of trading.
    Moreover, all of the equity securities and futures contracts held 
by the Fund

[[Page 45105]]

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.\17\ Additionally, the Exchange or FINRA, on behalf of the 
Exchange, are able to access, as needed, trade information for certain 
fixed income instruments reported to FINRA's Trade Reporting and 
Compliance Engine (``TRACE''). All statements and representations made 
in this filing regarding the description of the portfolio or reference 
assets, limitations on portfolio holdings or reference assets, 
dissemination and availability of index, reference asset, and intraday 
indicative values, and the applicability of Exchange rules specified in 
this filing shall constitute continued listing requirements for the 
Fund. The issuer has represented to the Exchange that it will advise 
the Exchange of any failure by the Fund or the Shares to comply with 
the continued listing requirements, and, pursuant to its obligations 
under Section 19(g)(1) of the Act, the Exchange will surveil for 
compliance with the continued listing requirements. If the Fund or the 
Shares are not in compliance with the applicable listing requirements, 
the Exchange will commence delisting procedures under Exchange Rule 
14.12.
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    \17\ 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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Availability of Information
    As noted above, the Fund will comply with the requirements for 
Managed Fund Shares related to Disclosed Portfolio, Net Asset Value, 
and the Intraday Indicative Value. Additionally, the intra-day, closing 
and settlement prices of exchange-traded portfolio assets, including 
ETPs and futures, will be readily available from the securities 
exchanges and futures exchanges trading such securities and futures, as 
the case may be, automated quotation systems, published or other public 
sources, or online information services such as Bloomberg or Reuters. 
Intraday price quotations on swaps, TIPS, and fixed income instruments 
are available from major broker-dealer firms and from third-parties, 
which may provide prices free with a time delay or in real-time for a 
paid fee.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with Section 
6(b) of the Act \18\ in general and Section 6(b)(5) of the Act \19\ 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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    \18\ 15 U.S.C. 78f.
    \19\ 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) 
except that the Fund may not comply with Rules 
14.11(i)(4)(C)(iv)(a),\20\ 14.11(i)(4)(C)(iv)(b),\21\ and/or 
14.11(i)(4)(C)(v).\22\ Further, the Exchange believes that the 
liquidity in the Treasury futures, credit default swaps, and listed 
Inflation Swaps 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. The 
Exchange also notes that the Fund will attempt to limit counterparty 
risk in non-cleared OTC swap contracts, namely total return swaps and 
certain Inflation Swaps, by entering into such contracts only with 
counterparties the Adviser believes are creditworthy and by limiting 
the Fund's exposure to each counterparty. The Adviser will monitor the 
creditworthiness of each counterparty and the Fund's exposure to each 
counterparty on an ongoing basis.
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    \20\ See supra note 4.
    \21\ See supra note 5.
    \22\ See supra note 6.
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    As it relates to Rule 14.11(i)(4)(C)(iv)(a), 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, equity 
securities, and certain of the listed credit default swaps 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 or FINRA, on behalf of the 
Exchange, may obtain information regarding trading in the Shares and 
the underlying futures contracts, equity securities, and certain of the 
listed credit default swaps 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.\23\ Additionally, the Exchange or FINRA, on behalf of the 
Exchange, may access, as needed, trade information for certain fixed 
income instruments reported to FINRA's Trade Reporting and Compliance 
Engine (``TRACE'').
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    \23\ See note 17, supra.
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    The Exchange notes that the Fund will meet and be subject to all 
other requirements of the Generic Listing Rules and other applicable 
continued listing requirements for Managed Fund Shares under Rule 
14.11(i), including those requirements regarding the Disclosed 
Portfolio and the requirement that the Disclosed Portfolio will be made 
available to all market participants at the same time,\24\ Intraday 
Indicative Value,\25\ suspension of trading or removal,\26\ trading 
halts,\27\ disclosure,\28\ and firewalls.\29\ Further, at least 100,000 
Shares will be outstanding upon the commencement of trading.
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    \24\ See Rule 14.11(i)(4)(B)(ii).
    \25\ See Rule 14.11(i)(4)(B)(i).
    \26\ See Rule 14.11(i)(4)(B)(iii).
    \27\ See Rule 14.11(i)(4)(B)(iv).
    \28\ See Rule 14.11(i)(6).
    \29\ 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.

[[Page 45106]]

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 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 shall: (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 proposal 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 No. SR-BatsBZX-2017-54 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 No. SR-BatsBZX-2017-54. 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 No. SR-BatsBZX-2017-54 and should be 
submitted on or before October 18, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\30\
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    \30\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-20625 Filed 9-26-17; 8:45 am]
 BILLING CODE 8011-01-P