Document ID: SEC-2010-1122-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2010-07-26T04:00Z

[Federal Register: July 26, 2010 (Volume 75, Number 142)]
[Notices]               
[Page 43606-43609]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26jy10-105]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62527; File No. SR-NYSEArca-2010-44]

 
Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting 
Approval of Proposed Rule Change Relating to the United States 
Commodity Index Fund

July 19, 2010.

I. Introduction

    On May 25, 2010, 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 
to list and trade shares of the United States Commodity Index Fund 
under NYSE Arca Equities Rule 8.200, Commentary .02. The proposed rule 
change was published for comment in the Federal Register on June 15, 
2010.\3\ The Commission received no comments on the proposal. This 
order grants approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 62237 (June 7, 
2010), 75 FR 33861 (``Notice'').
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II. Description of the Proposal

    The Exchange proposes to list and trade shares (``Units'') of the 
United States Commodity Index Fund (``USCI'' or ``Fund'') pursuant to 
Commentary .02 to NYSE Arca Equities Rule 8.200.\4\ The Fund is a 
commodity pool that is a series of United States Commodity Index Funds 
Trust (``Trust''), a Delaware statutory trust.\5\ The investment 
objective of USCI is to have the daily changes in percentage terms of 
the Units' net asset value (``NAV'') reflect the daily changes in 
percentage terms of the SummerHaven Dynamic Commodity Index Total 
Return (``Index''),\6\ less USCI's expenses. The Index, which is 
designed to reflect the performance of a diversified group of 
commodities, is owned and maintained by SummerHaven Index Management, 
LLC (``SummerHaven Indexing'') and calculated and published by 
Bloomberg, L.P. (``Bloomberg''). United States Commodity Funds LLC 
(``USCF'' or ``Sponsor'') is the sponsor of the Trust.\7\

[[Page 43607]]

USCI's trading advisor, SummerHaven Investment Management, LLC 
(``SummerHaven''),\8\ provides advisory services to the Sponsor with 
respect to the Index and the investment decisions of USCI. The Sponsor, 
SummerHaven Indexing, SummerHaven, and Bloomberg are not affiliated 
with a broker-dealer and are subject to procedures designed to prevent 
the use and dissemination of material, non-public information regarding 
the Index or the Fund's portfolio.\9\
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    \4\ Commentary .02 to NYSE Arca Equi ties Rule 8.200 applies to 
the listing and trading, or trading pursuant to unlisted trading 
privileges, of Trust Issued Receipts that invest in ``Financial 
Instruments.'' The term ``Financial Instruments'' is defined in 
Commentary .02(b)(4) to NYSE Arca Equities Rule 8.200 as any 
combination of investments, including cash; securities; options on 
securities and indices; futures contracts; options on futures 
contracts; forward contracts; equity caps, collars and floors; and 
swap agreements.
    \5\ The Fund has filed Amendment No. 3 to Form S-1, dated May 
25, 2010 (File No. 333-164024) (``Registration Statement'').
    \6\ The Index is designed to reflect the performance of a fully 
margined or collateralized portfolio of 14 commodity futures 
contracts with equal weights, selected each month from a universe of 
27 eligible commodity futures contracts. The Index is composed of 
physical, non-financial commodity futures contracts with active and 
liquid markets traded upon futures exchanges in major industrialized 
countries. The futures contracts are denominated in U.S. dollars and 
weighted equally by notional amount. The commodity sectors for the 
Index include grains (e.g., wheat, corn, soybeans, etc.), precious 
metals (e.g., gold, silver, platinum), industrial metals (e.g., 
zinc, nickel, aluminum, copper, etc.), livestock (e.g., live cattle, 
lean hogs, feeder cattle), softs (e.g., sugar, cotton, coffee, 
cocoa) and energy (e.g., crude oil, natural gas, heating oil, etc.). 
The eligible commodities and relevant futures exchanges on which the 
futures contract are listed are identified and discussed in the 
Registration Statement, along with a specific discussion of position 
limits for these contracts.
    \7\ The Sponsor is a Delaware limited liability company that is 
registered as a commodity pool operator with the Commodity Futures 
Trading Commission (``CFTC'') and a member of the National Futures 
Association (``NFA''). The Sponsor controls the operations of USCI.
    \8\ Summerhaven is a Delaware limited liability company that is 
registered as a commodity trading advisor and a commodity pool 
operator with the CFTC and is a member of the NFA.
    \9\ In the event the Sponsor, SummerHaven Indexing, SummerHaven, 
or Bloomberg become affiliated with a broker-dealer, they will be 
required to implement a fire wall with respect to such broker-dealer 
regarding access to information concerning the composition and/or 
changes to the Index or portfolio. E-mail from Michael Cavalier, 
Chief, Counsel, NYSE Euronext, to Steve Varholik, Special Counsel, 
Division of Trading and Markets, Commission, dated July 13, 2010.
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    It is anticipated that the net assets of USCI will consist 
primarily of investments in futures contracts (such futures contracts, 
collectively, ``Futures Contracts'') for commodities that are traded on 
the New York Mercantile Exchange (``NYMEX''), ICE Futures (``ICE''), 
Chicago Board of Trade (``CBOT''), Chicago Mercantile Exchange 
(``CME''), London Metal Exchange (``LME''), Commodity Exchange, Inc. 
(``COMEX''), or on other foreign exchanges (such exchanges, 
collectively, ``Futures Exchanges'') and, to a lesser extent, in order 
to comply with regulatory requirements or in view of market conditions, 
other commodity-based contracts and instruments such as cash-settled 
options on Futures Contracts, forward contracts relating to 
commodities, cleared swap contracts, and other over-the-counter 
transactions that are based on the price of commodities and Futures 
Contracts (collectively, ``Other Commodity-Related Investments,'' and 
together with Futures Contracts, collectively, ``Commodity 
Interests''). Market conditions that the Sponsor currently anticipates 
could cause USCI to invest in Other Commodity-Related Investments would 
be those allowing USCI to obtain greater liquidity or to execute 
transactions with more favorable pricing. The Sponsor expects to manage 
USCI's investments directly, using the trading advisory services of 
SummerHaven for guidance with respect to the Index and USCF's selection 
of investments on behalf of USCI.
    USCI seeks to achieve its investment objective by investing in 
Futures Contracts and Other Commodity-Related Investments such that 
daily changes in USCI's NAV will closely track the changes in the 
Index.\10\ The Index is comprised of 14 Futures Contracts that will be 
selected on a monthly basis from a list of 27 possible Futures 
Contracts. The Futures Contracts that at any given time make up the 
Index are referred to herein as ``Benchmark Component Futures 
Contracts.'' USCI anticipates that to meet its investment objective, it 
will invest first in the current Benchmark Component Futures Contracts 
and other Futures Contracts intended to replicate the return on the 
current Benchmark Component Futures Contracts and, thereafter, to 
comply with regulatory requirements or in view of market conditions, in 
Other Commodity-Related Investments intended to replicate the return on 
the Benchmark Component Futures Contracts, including cleared swap 
contracts, other over-the-counter transactions, and in other Futures 
Contracts.
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    \10\ Futures Contracts may have various expiration dates.
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    USCI's positions in Commodity Interests will be rebalanced on a 
monthly basis in order to track the changing nature of the Index. If 
Futures Contracts relating to a particular commodity remains in the 
Index from one month to the next, such Futures Contracts will be 
rebalanced to the 7.14% target weight, as described below. 
Specifically, on a specified day near the end of each month called the 
``Selection Date,'' it will be determined if a current Benchmark 
Component Futures Contract will be replaced by a new Futures Contract 
in either the same or different underlying commodity to be used as a 
Benchmark Component Futures Contract for the following month, in which 
case USCI's investments would have to be changed accordingly. In order 
that USCI's trading does not unduly cause extraordinary market 
movements, and to make it more difficult for third parties to profit by 
trading based on market movements that could be expected from changes 
in the Benchmark Component Futures Contracts, USCI's investments 
typically will not be rebalanced entirely on a single day, but rather 
will typically be rebalanced over a period of four days. After 
fulfilling the margin and collateral requirements with respect to its 
Commodity Interests, USCI will invest the remainder of its proceeds 
from the sale of baskets in short-term obligations of the United States 
government (``Treasury Securities'') or cash equivalents, and/or hold 
such assets in cash (generally in interest-bearing accounts).
    The Sponsor endeavors to place USCI's trades in Commodity Interests 
and otherwise manage USCI's investments so that A will be within plus/
minus 10 percent of B, where A is the average daily change in USCI's 
NAV for any period of 30 successive valuation days, i.e., any NYSE Arca 
trading day as of which USCI calculates its NAV, and B is the average 
daily change in the Index over the same period.
    The Sponsor will employ a ``neutral'' investment strategy intended 
to track the changes in the Index regardless of whether the Index goes 
up or goes down. The Sponsor does not intend to operate USCI in a 
fashion such that its per-Unit NAV will equal, in dollar terms, the 
spot prices of the commodities comprising the Index or the prices of 
any particular group of Futures Contracts.
    The principal types of Commodity Interests in which USCI may invest 
are set forth in the Registration Statement and include futures 
contracts, forward contracts, swaps or options on futures contracts, 
forward contracts or commodities on the spot market. USCI will invest 
in Commodity Interests to the fullest extent possible without being 
leveraged or unable to satisfy its current or potential margin or 
collateral obligations with respect to its investments in Commodity 
Interests. The primary focus of the Sponsor is the investment in 
Commodity Interests and the management of USCI's investments in 
Treasury Securities, cash, and/or cash equivalents.
    The specific Commodity Interests purchased will depend on various 
factors, including a judgment by the Sponsor as to the appropriate 
diversification of USCI's investments. While the Sponsor anticipates 
significant investments in Futures Contracts on the Futures Exchanges, 
for various reasons, including the ability to enter into the precise 
amount of exposure to the commodities market and position limits on 
Futures Contracts, it may also invest in Other Commodity-Related 
Investments, such as swaps, in the over-the-counter market. If USCI is 
required by law or regulation, or by one of its regulators, including a 
Futures Exchange, to reduce its position in one or more Futures 
Contracts to the applicable position limit or to a specified 
accountability level, a substantial portion of USCI's assets could be 
invested in Other Commodity-Related Investments that

[[Page 43608]]

are intended to replicate the return on the Index or particular 
Benchmark Component Futures Contracts. As USCI's assets reach higher 
levels, USCI is more likely to exceed position limits, accountability 
levels or other regulatory limits and, as a result, it is more likely 
that it will invest in Other Commodity-Related Investments at such 
higher levels.
    The Sponsor may not be able to fully invest USCI's assets in 
Futures Contracts having an aggregate notional amount exactly equal to 
USCI's NAV. For example, as standardized contracts, the Benchmark 
Component Futures Contracts included in the Index are for a specified 
amount of a particular commodity, and USCI's NAV and the proceeds from 
the sale of a Creation Basket is unlikely to be an exact multiple of 
the amounts of those contracts. As a result, in such circumstances, 
USCI may be better able to achieve the exact amount of exposure to 
changes in price of the Benchmark Component Futures Contracts through 
the use of Other Commodity-Related Investments, such as over-the-
counter contracts that have better correlation with changes in price of 
the Benchmark Component Futures Contracts. USCI anticipates that, to 
the extent it invests in Futures Contracts other than the Benchmark 
Component Futures Contracts and Other Commodity-Related Investments, it 
will enter into various non-exchange-traded derivative contracts to 
hedge the short-term price movements of such Futures Contracts and 
Other Commodity-Related Investments against the current Benchmark 
Component Futures Contracts.
    The Exchange represents that the Fund will meet the initial and 
continued listing requirements applicable to Trust Issued Receipts in 
NYSE Arca Equities Rule 8.200 and Commentary .02 thereto. With respect 
to the application of Rule 10A-3 under the Act,\11\ the Trust relies on 
the exception contained in Rule 10A-3(c)(7).\12\ A minimum of 100,000 
Units will be outstanding as of the start of trading on the Exchange.
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    \11\ 17 CFR 240.10A-3.
    \12\ 17 CFR 240.10A-3(c)(7).
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    Additional details regarding the Trust; trading and investment 
policies of the Fund, including the Fund's rebalancing of positions in 
Commodity Interests; creations and redemptions of the Units; 
information relating to the Index and Index methodology; information 
relating to Futures Contracts, Futures Exchanges, hours of trading on 
the Futures Exchanges, and position limits; investment risks; NAV 
calculation; dissemination of certain key values; availability of 
information about the Units; and information relating to trading halts, 
applicable Exchange trading rules, surveillance, and the Information 
Bulletin, among other things, can be found in the Notice and/or the 
Registration Statement, as applicable.\13\
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    \13\ See supra notes 3 and 5.
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III. Discussion and Commission's Findings

    The Commission has carefully reviewed the proposed rule change and 
finds that it is consistent with the requirements of Section 6 of the 
Act \14\ and the rules and regulations thereunder applicable to a 
national securities exchange.\15\ In particular, the Commission finds 
that the proposal is consistent with Section 6(b)(5) of the Act,\16\ 
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 foster cooperation 
and coordination with persons engaged in facilitating transactions in 
securities, and to remove impediments to and perfect the mechanism of a 
free and open market and a national market system.
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    \14\ 15 U.S.C. 78f.
    \15\ 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).
    \16\ 15 U.S.C. 78f(b)(5).
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    The Commission finds that the proposal to list and trade Units on 
the Exchange also is consistent with Section 11(a)(1)(C)(iii) of the 
Act,\17\ which sets forth Congress' finding that it is in the public 
interest and appropriate for the protection of investors to assure the 
availability to brokers, dealers, and investors of information with 
respect to quotations for and transactions in securities. Quotation and 
last-sale information regarding the Units will be disseminated through 
the facilities of the Consolidated Tape Association. In addition, 
values of the Index are computed by Bloomberg and disseminated 
approximately every 15 seconds from 8 a.m. to 5 p.m. Eastern Time 
(``E.T.''). An Indicative Trust Value (``ITV''), which will be 
calculated by using the prior day's closing NAV per Unit of the Fund as 
a base and updated throughout the NYSE Arca Core Trading Session of 
9:30 a.m. to 4 p.m. E.T. each trading day to reflect current changes in 
the value of the Futures Contracts, will be disseminated on a per-Unit 
basis by one or more major market data vendors every 15 seconds during 
the Core Trading Session.\18\ The Fund will provide Web site disclosure 
of portfolio holdings daily and will include, as applicable, the names 
and value (in U.S. dollars) of Financial Instruments and 
characteristics of such instruments and cash equivalents, and amount of 
cash held in the portfolio of the Fund. The closing prices and 
settlement prices of the Futures Contracts are also available from the 
Web sites of the applicable futures exchanges, automated quotation 
systems, published or other public sources, or on-line information 
services such as Bloomberg or Reuters. The relevant futures exchanges 
also provide delayed futures information on current and past trading 
sessions and market news free of charge on their respective Web sites. 
The specific contract specifications for the Futures Contracts are also 
available on such Web sites, as well as other financial informational 
sources. Also, the Fund's Web site will display the end-of-day closing 
index levels and NAV. The NAV for the Fund will be calculated by the 
Administrator once a day and will be disseminated daily to all market 
participants at the same time. The Exchange will make available on its 
Web site daily trading volume of each of the Units, closing prices of 
such Units, and number of Units outstanding.
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    \17\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \18\ While the ITV will be updated during the NYSE Arca Core 
Trading Session when Futures Exchanges are trading any Futures 
Contracts held by the Fund, a static ITV will be disseminated 
between the close of trading of all applicable Futures Contracts on 
Futures Exchanges and the close of the NYSE Arca Core Trading 
Session.
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    The Commission further believes that the proposal to list and trade 
the Units is reasonably designed to promote fair disclosure of 
information that may be necessary to price the Units appropriately and 
to prevent trading when a reasonable degree of transparency cannot be 
assured. If the Exchange becomes aware that the NAV is not being 
disseminated to all market participants at the same time, it will halt 
trading until such time as the NAV is available to all market 
participants. Further, the Exchange may halt trading during the day in 
which the interruption to the dissemination of the Index value, ITV, or 
the value of the underlying Futures Contracts occurs. If the 
interruption to the dissemination of the Index value, ITV, 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. In addition, 
the Web site disclosure of

[[Page 43609]]

the portfolio composition of the Fund 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. Therefore, the same 
portfolio information will be provided on the public Web site, as well 
as in electronic files provided to Authorized Purchasers. Accordingly, 
each investor will have access to the current portfolio composition of 
the Fund through the Fund's Web site. Lastly, the trading of Units will 
be subject to NYSE Arca Equities Rule 8.200, Commentary .02(e), which 
sets forth certain restrictions on ETP Holders \19\ acting as 
registered Market Makers \20\ in Trust Issued Receipts to facilitate 
surveillance.
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    \19\ See NYSE Arca Equities Rule 1.1(n) (defining ETP Holder).
    \20\ See NYSE Arca Equities Rule 1.1(u) (defining Market Maker).
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    The Exhange has represented that Units are deemed equity securities 
subject to the Exchange's rules governing the trading of equity 
securities. In support of this proposal, the Exchange has made 
representations, including the following:
    (1) The Fund 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 Units during all trading sessions.
    (3) The Exchange's surveillance procedures are adequate to properly 
monitor Exchange trading of the Units in all trading sessions and to 
deter and detect violations of Exchange rules and applicable Federal 
securities laws. The Exchange is able to obtain information regarding 
trading in the Units, the physical commodities included in, or options, 
futures, or options on futures on, Units through ETP Holders, in 
connection with such ETP Holders' proprietary or customer trades which 
they effect on any relevant market. The Exchange currently has in place 
an Information Sharing Agreement with the ICE and LME for the purpose 
of providing information in connection with trading in or related to 
Futures Contracts traded on their respective exchanges. The Exchange 
can obtain market surveillance information, including customer identity 
information, with respect to transactions occurring on the exchanges 
that are members of the Intermarket Surveillance Group (``ISG''), 
including CME, CBOT, COMEX, and NYMEX. A list of ISG members is 
available at http://www.isgportal.org.\21\
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    \21\ The Exchange notes that not all Commodity Interests 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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    (4) With respect to Fund assets traded on exchanges, not more than 
10% of the weight of such assets in the aggregate shall consist of 
components whose principal trading market is not a member of ISG or is 
a market with which the Exchange does not have a comprehensive 
surveillance sharing agreement.
    (5) 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 Units. 
Specifically, the Information Bulletin will discuss the following: (a) 
The risks involved in trading the Units during the Opening and Late 
Trading Sessions when an updated ITV will not be calculated or publicly 
disseminated; (b) the procedures for purchases and redemptions of Units 
in Creation Baskets and Redemption Baskets (and that Units 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 Units; 
(d) how information regarding the ITV is disseminated; (e) the 
requirement that ETP Holders deliver a prospectus to investors 
purchasing newly issued Units prior to or concurrently with the 
confirmation of a transaction; and (f) trading information.
    (6) A minimum of 100,000 Units will be outstanding as of the start 
of trading on the Exchange.
    (7) With respect to the application of Rule 10A-3 under the Act, 
the Trust will rely on the exception contained in Rule 10A-3(c)(7).\22\
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    \22\ See supra notes 11 and 12 and accompanying text.
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    This approval order is based on the Exchange's representations.\23\
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    \23\ The Commission notes that it does not regulate the market 
for futures in which the Fund plans to take positions, which is the 
responsibility of the CFTC. The CFTC has the authority to set limits 
on the positions that any person may take in futures on commodities. 
These limits may be directly set by the CFTC, or by the markets on 
which the futures are traded. The Commission has no role in 
establishing position limits on futures in commodities, even though 
such limits could impact a commodity-based exchange-traded product 
that is under the jurisdiction of the Commission.
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    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with the Act and the rules and regulations 
thereunder applicable to a national securities exchange.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\24\ that the proposed rule change (SR-NYSEArca-2010-44) be, and it 
hereby is, approved.
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    \24\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-18160 Filed 7-23-10; 8:45 am]
BILLING CODE 8010-01-P