Document ID: SEC-2019-0204-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe BZX Exchange, Inc.
Posted Date: 2019-02-25T05:00Z

[Federal Register Volume 84, Number 37 (Monday, February 25, 2019)]
[Notices]
[Pages 6026-6031]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-03175]

=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85166; File No. SR-CboeBZX-2018-077]

Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order 
Granting Approval of a Proposed Rule Change, as Modified by Amendment 
No. 1, To List and Trade Shares of the JPMorgan Inflation Managed Bond 
ETF of the J.P. Morgan Exchange-Traded Fund Trust Under Rule 14.11(i), 
Managed Fund Shares

February 19, 2019.

I. Introduction

    On November 2, 2018, Cboe BZX Exchange, Inc. (``Exchange'' or 
``BZX'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to list and trade shares (``Shares'') of the 
JPMorgan Inflation Managed Bond ETF (``Fund'') of the J.P. Morgan 
Exchange-Traded Fund Trust (``Trust'') under Rule 14.11(i) (``Managed 
Fund Shares'').
---------------------------------------------------------------------------

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

    The proposed rule change was published for comment in the Federal 
Register on November 21, 2018.\3\ On December 10, 2018, the Exchange 
filed Amendment No. 1 to the proposed rule change.\4\ On December 21, 
2018, the

[[Page 6027]]

Commission extended the time period within which to approve the 
proposed rule change, disapprove the proposed rule change, or institute 
proceedings to determine whether to disapprove the proposed rule 
change.\5\ The Commission has received no comments on the proposal, as 
modified by Amendment No. 1. This order grants approval of the proposed 
rule change, as modified by Amendment No. 1.
---------------------------------------------------------------------------

    \3\ See Securities Exchange Act Release No. 84604 (November 15, 
2018), 83 FR 58789 (``Notice'').
    \4\ In Amendment No. 1, which amended and replaced the proposed 
rule change in its entirety, the Exchange: (a) Amended the universe 
of Equity Holdings (as defined herein); (b) stated where intraday 
price quotations for Bonds (as defined herein) and Equity Holdings 
that are not exchange-traded could be found; (c) represented that 
the Equity Holdings held by the Fund that 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 would be the 
exchange-listed Equity Holdings; and (d) made technical and 
conforming changes. Because Amendment No. 1 does not materially 
alter the substance of the proposed rule change or raise unique or 
novel regulatory issues under the Act, Amendment No. 1 is not 
subject to notice and comment. Amendment No. 1 to the proposed rule 
change is available at: https://www.sec.gov/comments/SR-cboebzx-2018-077/srcboebzx2018077-4777675-176818.pdf.
    \5\ See Securities Exchange Act Release No. 84944, 83 FR 67751 
(December 31, 2018).
---------------------------------------------------------------------------

II. Exchange's Description of the Proposed Rule Change, as Modified by 
Amendment No. 1

    The Exchange proposes to list and trade the Shares of the Fund 
pursuant to BZX Rule 14.11(i), which governs the listing and trading of 
Managed Fund Shares on the Exchange. The Shares will be offered by the 
Trust, which was established as a Delaware statutory trust.\6\ The Fund 
will be an actively managed exchange-traded fund. J.P Morgan Investment 
Management, Inc. is the investment adviser (``Adviser'') and the 
administrator to the Fund. JPMorgan Chase Bank, N.A. is the custodian 
and transfer agent for the Trust. JPMorgan Distribution Services, Inc. 
serves as the distributor for the Trust. The Exchange represents the 
Adviser is not a broker-dealer, but is affiliated with multiple broker-
dealers and has implemented and will maintain ``fire walls'' with 
respect to such broker-dealers regarding access to information 
concerning the composition of, and/or changes to, the Fund's portfolio. 
In addition, Adviser personnel who make decisions regarding the Fund's 
portfolio are subject to procedures designed to prevent the use and 
dissemination of material, non-public information regarding the Fund's 
portfolio.\7\
---------------------------------------------------------------------------

    \6\ The Exchange represents that the Trust is registered under 
the Investment Company Act of 1940 (``1940 Act''). See Registration 
Statement on Form N-1A for the Trust, dated July 31, 2018 (File Nos. 
333-191837 and 811-22903) (``Registration Statement''). The Exchange 
further represents that the Trust has obtained certain exemptive 
relief under the 1940 Act.
    \7\ See BZX Rule 14.11(i)(7). The Exchange further represents 
that, in the event that (a) the Adviser becomes registered as a 
broker-dealer or newly affiliated with another broker-dealer, or (b) 
any new adviser or sub-adviser is a registered broker-dealer or 
becomes affiliated with a broker-dealer, it will implement and 
maintain a fire wall with respect to its relevant personnel or such 
broker-dealer affiliate, as applicable, regarding access to 
information concerning the composition of, and/or changes to, the 
portfolio, and will be subject to procedures designed to prevent the 
use and dissemination of material, non-public information regarding 
such portfolio.
---------------------------------------------------------------------------

    Under the proposal, the Exchange seeks to permit the Fund to hold 
Inflation Swaps and Other Derivatives, each as defined below, in a 
manner that may not comply with BZX Rules 14.11(i)(4)(C)(iv)(a),\8\ 
14.11(i)(4)(C)(iv)(b),\9\ and/or 14.11(i)(4)(C)(v),\10\ as further 
described below.\11\ Otherwise, the Exchange represents that the Fund 
will comply with all other listing requirements on an initial and 
continued listing basis under BZX Rule 14.11(i).
---------------------------------------------------------------------------

    \8\ BZX 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 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, interest rate swaps, and Inflation 
Swaps, as further described below.
    \9\ BZX 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 would meet neither the 65% nor 
the 30% requirements of BZX Rule 14.11(i)(4)(C)(iv)(b). 
Specifically, the Exchange is proposing that the Fund be exempt from 
this requirement as it relates to the Fund's holdings in listed 
derivatives, which include U.S. Treasury futures, Eurodollar 
futures, options on U.S. Treasuries and Treasury futures, credit 
default swaps, and certain Inflation Swaps and interest rate swaps, 
as further described below, which could constitute as much as 100% 
of the weight of the portfolio (including gross notional exposures) 
based on a single underlying reference asset.
    \10\ BZX 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 as it relates to the Fund's holdings in 
OTC derivatives, which could constitute as much as 75% of the weight 
of the portfolio (including gross notional exposures).
    \11\ The Adviser notes that the Fund may by virtue of its 
holdings be issued certain exchange-listed or OTC equity 
instruments, including common and preferred stock, common stock 
warrants and rights, and securities issued by real estate investment 
trusts (collectively, ``Equity Holdings''), that may not meet the 
requirements of Rule 14.11(i)(4)(C)(i). The Fund will not purchase 
such instruments and will dispose of such holdings as the Adviser 
determines is in the best interest of the Fund's shareholders. 
Equity Holdings will not constitute more than 10% of the Fund's net 
assets. The Adviser expects that the Fund will generally acquire 
Equity Holdings through issuances that it receives by virtue of its 
other holdings, such as corporate actions or convertible securities.
---------------------------------------------------------------------------

A. Exchange's Description of the Fund's Primary Investments \12\
---------------------------------------------------------------------------

    \12\ The Commission notes that additional information regarding 
the Fund, the Trust, and the Shares, including investment 
strategies, risks, creation and redemption procedures, fees, 
portfolio holdings disclosure policies, calculation of net asset 
value (``NAV''), distributions, and taxes, among other things, can 
be found in Amendment No. 1 to the proposed rule change and the 
Registration Statement, as applicable. See Amendment No. 1 and 
Registration Statement, supra notes 4 and 6, respectively.
---------------------------------------------------------------------------

    According to the Exchange, the Fund is designed to protect the 
total return \13\ generated by its fixed income holdings from inflation 
risk and will seek to maximize inflation protected total return. The 
Fund seeks to achieve its investment objective by investing, under 
Normal Market Conditions,\14\ at least 80% of its net assets in 
Bonds,\15\ Inflation Hedging Instruments, and Other Derivatives, as 
defined below.
---------------------------------------------------------------------------

    \13\ According to the Exchange, total return includes income and 
capital appreciation.
    \14\ As defined in BZX 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.
    \15\ For purposes of this proposal, the term ``Bond'' includes 
only the following U.S. dollar denominated instruments issued by the 
U.S. Government or its agencies and instrumentalities, a domestic or 
a foreign corporation or a municipality: Corporate bonds, U.S. 
government and agency debt securities (excluding Treasury Inflation 
Protected Securities (``TIPS''), which, as described below, may be 
held by the Fund in order to attempt to mitigate inflation risk), 
asset-backed securities, and mortgage-related and mortgage-backed 
securities. Mortgage-related and mortgage-backed securities may be 
structured as collateralized mortgage obligations (agency and non-
agency), stripped mortgage-backed securities (interest-only or 
principal-only), commercial mortgage-backed securities, mortgage 
pass-through securities, collateralized mortgage obligations, 
adjustable rate mortgages, convertible bonds, and zero-coupon 
obligations. The Exchange notes that the Fund's holdings in Bonds 
will meet the requirements of BZX Rule 14.11(i)(4)(C)(ii)(a)-(e) 
related to the fixed income securities portion of the Fund, 
including the requirement that non-agency, non-GSE, and privately-
issued mortgage-related and other asset-backed securities components 
of a portfolio shall not account, in the aggregate, for more than 
20% of the weight of the fixed income portion of the portfolio.
---------------------------------------------------------------------------

    The Fund will gain exposure to U.S. dollar-denominated bonds 
primarily through investing directly in Bonds. Up to 10% of the Fund's 
total assets may be invested in securities rated below investment grade 
(junk bonds). Junk bonds are rated in the fifth or lower rated 
categories (for example, BB+ or

[[Page 6028]]

lower by Standard & Poor's Ratings Services and Ba1 or lower by 
Moody's). The Fund may also use the following instruments to gain 
exposure to credit or interest rates: Credit default swaps,\16\ 
interest rate swaps,\17\ Eurodollar futures, U.S. Treasury futures, 
options on U.S. Treasury Futures, and options on U.S. Treasuries \18\ 
(collectively, ``Other Derivatives'').
---------------------------------------------------------------------------

    \16\ Credit default swaps held by the Fund will be traded on a 
U.S. Swap Execution Facility registered with the Commodity Futures 
Trading Commission (``CFTC''). The Fund may hold up to 10% of its 
net assets in credit default swaps that are not investment-grade at 
the time of purchase.
    \17\ Interest rate swaps held by the Fund may include listed 
swaps, centrally cleared OTC swaps, or non-cleared OTC swaps. To the 
extent that the Fund holds listed interest rate swaps, all such 
listed swaps held by the Fund will be traded on a U.S. Swap 
Execution Facility registered with the CFTC.
    \18\ Options on U.S. Treasuries held by the Fund may include 
listed or OTC options. The Fund will attempt to limit counterparty 
risk in non-listed and non-cleared OTC options 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 Exchange represents that the Adviser will monitor 
the creditworthiness of each counterparty and the Fund's exposure to 
each counterparty on an ongoing basis.
---------------------------------------------------------------------------

    The Fund will attempt to mitigate the inflation risk of the Fund's 
exposure to Bonds primarily through the use of either over-the-counter 
(``OTC'') or listed inflation swaps (``Inflation Swaps''),\19\ which 
are managed on an active basis. Additionally, the Fund may also attempt 
to mitigate inflation risk through investing in TIPS (together with 
Inflation Swaps, collectively, ``Inflation Hedging Instruments''). The 
Exchange is proposing to allow the Fund to hold up to 100% of the 
weight of its portfolio (including gross notional exposure) in 
Inflation Swaps and Other Derivatives, collectively, in a manner that 
may not comply with BZX 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\
---------------------------------------------------------------------------

    \19\ The Fund will attempt to limit counterparty risk in non-
listed and non-cleared OTC 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 Exchange represents that the Adviser will monitor 
the creditworthiness of each counterparty and the Fund's exposure to 
each counterparty on an ongoing basis. To the extent that the Fund 
holds listed Inflation Swaps, all such listed Inflation Swaps held 
by the Fund will be traded on a U.S. Swap Execution Facility 
registered with the CFTC. Inflation Swaps held by the Fund will 
reference the Consumer Price Index For All Urban Consumers (CPI-U).
    \20\ See supra note 8.
    \21\ See supra note 9.
    \22\ See supra note 10.
---------------------------------------------------------------------------

    The Fund's investments, including derivatives, will be consistent 
with the 1940 Act and the Fund's investment objective and policies and 
will not be used to enhance leverage (although certain derivatives and 
other investments may result in leverage).\23\ 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 terms Inflation 
Swaps and Other Derivatives. The Fund's use of derivative instruments 
will be collateralized. In addition to the use described above, the 
Fund will also use derivative holdings for efficient portfolio 
management, profit and gain for the Fund, interest rate hedging, and 
managing credit risk.
---------------------------------------------------------------------------

    \23\ The Fund will include appropriate risk disclosure in its 
offering documents, including leveraging risk. Leveraging risk is 
the risk that certain transactions of a fund, including a fund's use 
of derivatives, may give rise to leverage, causing a fund to be more 
volatile than if it had not been leveraged. The Fund's investments 
in derivative instruments will be made in accordance with the 1940 
Act and consistent with the Fund's investment objective and 
policies. To mitigate leveraging risk, the Fund will segregate or 
earmark liquid assets determined to be liquid by the Adviser in 
accordance with procedures established by the Trust's Board and in 
accordance with the 1940 Act (or, as permitted by applicable 
regulations, enter into certain offsetting positions) to cover its 
obligations under derivative instruments.
---------------------------------------------------------------------------

B. Exchange's Description of the Fund's Other Investments

    Under Normal Market Conditions, the Fund may invest up to 20% of 
its net assets in the following: One or more ETFs,\24\ Equity Holdings, 
money market mutual funds, including affiliated money market mutual 
funds, bank obligations, convertible securities (including contingent 
convertible securities), loan assignment and participations, 
commitments to purchase loan assignments, auction rate securities, 
commercial paper, custodial receipts, inverse floating rate 
instruments, non-ETF investment company securities, repurchase and 
reverse repurchase agreements, short-term funding agreements, 
structured investments, synthetic variable rate instruments, trust 
preferred securities, when-issued securities, delayed delivery 
securities, forward commitments, pay-in-kind securities, and deferred 
payment securities (collectively, excluding ETFs and Equity Holdings, 
``20% OTC Instruments''). The Fund may also engage in securities 
lending.
---------------------------------------------------------------------------

    \24\ For purposes of this proposal, the term ``ETF'' includes 
Portfolio Depositary Receipts, Index Fund Shares, and Managed Fund 
Shares as defined in BZX Rules 14.11(b), (c), and (i), respectively, 
and their equivalents on other national securities exchanges.
---------------------------------------------------------------------------

C. Exchange's Description of the Application of the Generic Listing 
Requirements

    The Exchange represents 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 BZX Rules 14.11(i)(4)(C)(iv)(a),\25\ 
14.11(i)(4)(C)(iv)(b),\26\ and 14.11(i)(4)(C)(v).\27\ With respect to 
the requirement in BZX Rule 14.11(i)(4)(C)(iv)(a) that at least 90% of 
the weight of the listed derivatives portion of the portfolio be in 
listed derivatives for which the Exchange may obtain information via 
ISG or for which the principal market is a market with which the 
Exchange has a comprehensive surveillance sharing agreement, 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. Additionally, the Exchange 
represents that all of the listed instruments that would not meet this 
requirement would nevertheless have a primary market that is a swap 
execution facility that is registered with and under the regulatory 
oversight of the CFTC.\28\
---------------------------------------------------------------------------

    \25\ See supra note 8.
    \26\ See supra note 9.
    \27\ See supra note 10.
    \28\ The Exchange represents that not all CFTC registered swap 
execution facilities are members or affiliates of members of the 
ISG.
---------------------------------------------------------------------------

    The Exchange believes that the liquidity in the Treasury 
futures,\29\ Eurodollar futures,\30\ and TIPS \31\ markets mitigates 
the concern that BZX Rule 14.11(i)(4)(C)(iv)(b) is intended to address, 
and that such liquidity would help prevent the Shares from being 
susceptible to manipulation. Further, the Exchange believes that for 
listed swaps, including credit default swaps, interest rate swaps, and 
Inflation Swaps, the price transparency and surveillance performed by 
the applicable swap execution facility would similarly act to mitigate 
the risk of manipulation of the Shares. The Exchange also believes that

[[Page 6029]]

the size of the inflation swaps market,\32\ which would include all of 
the Inflation Swaps that the Fund intends to invest in, would also 
mitigate manipulation concerns relating to both listed and OTC 
Inflation Swaps held by the Fund.\33\
---------------------------------------------------------------------------

    \29\ According to the Exchange, in 2017, there were 
approximately 744 million Treasury futures contracts traded.
    \30\ According to the Exchange, in 2017, there were 
approximately 367 million Eurodollar futures contracts traded.
    \31\ According to the Exchange, in 2017, there were 
approximately $17 billion worth of TIPS traded at primary dealers on 
a daily basis.
    \32\ For purposes of this discussion, the term ``inflation swaps 
market'' means any swap contract that references either a measure of 
inflation, an inflation index, or an instrument designed to transfer 
inflation risk from one party to another.
    \33\ According to publicly available numbers from LCH. Clearnet 
Limited, which clears both listed and OTC swaps, as of October 26, 
2018, there had been approximately $637 billion in U.S. dollar-
denominated inflation swaps traded year-to-date, which would include 
the Inflation Swaps that the Fund intends to invest in, cleared 
through their platform alone.
---------------------------------------------------------------------------

    As it relates to BZX Rule 14.11(i)(4)(C)(v), which provides that 
the notional value of OTC derivatives shall not exceed 20% of the 
weight of the portfolio (including gross notional exposures), in an 
effort to minimize exposure to potentially illiquid and manipulable 
derivatives contracts, the Exchange notes that the inflation swaps 
market, which would include all of the listed and OTC Inflation Swaps 
that the Fund intends to invest in, is large and liquid, which the 
Exchange believes further mitigates the concerns which BZX Rule 
14.11(i)(4)(C)(v) is intended to address. The Exchange also notes that 
the Fund will attempt to limit counterparty risk in non-cleared OTC 
swap contracts, OTC Inflation Swaps, and interest rate 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 Exchange also notes that the Adviser will monitor the 
creditworthiness of each counterparty and the Fund's exposure to each 
counterparty on an ongoing basis. Further, the Exchange notes that 
notional principal never changes hands in such swaps transactions, and 
it is a theoretical value used to base the exchanged payments. The 
Exchange believes that a more accurate representation of the swaps 
value in order to monitor total counterparty risk would be the mark-to 
market value of the swap since inception, which the Adviser generally 
expects to remain below 15% of the Fund's net assets.
    The Exchange represents that, except for the exceptions to BZX Rule 
14.11(i)(4)(C) as 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 BZX 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, NAV, 
and the intraday indicative value (``IIV''), rules governing the 
trading of equity securities, trading hours, trading halts, 
surveillance, firewalls, and the information circular, as set forth in 
Exchange rules applicable to Managed Fund Shares and the orders 
approving such rules. According to the Exchange, at least 100,000 
Shares will be outstanding upon the commencement of trading.
    The Exchange further represents that all of the ETFs, exchange-
listed Equity Holdings, futures contracts, and listed options 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.\34\ Additionally, the 
Exchange or the Financial Industry Regulatory Authority (``FINRA''), on 
behalf of the Exchange, is able to access as needed trade information 
for certain fixed income instruments reported to FINRA's Trade 
Reporting and Compliance Engine (``TRACE'') and municipal securities 
reported to the Municipal Securities Rulemaking Board's (``MSRB'') 
Electronic Municipal Market Access system. FINRA may also access data 
obtained from the MSRB relating to municipal bond trading activity for 
surveillance purposes in connection with trading in the Shares.
---------------------------------------------------------------------------

    \34\ 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.
---------------------------------------------------------------------------

III. Discussion and Commission's Findings

    After careful review, the Commission finds that the Exchange's 
proposal to list and trade the Shares, as modified by Amendment No. 1, 
is consistent with the Act and the rules and regulations thereunder 
applicable to a national securities exchange.\35\ In particular, the 
Commission finds that the proposed rule change, as modified by 
Amendment No. 1, is consistent with Section 6(b)(5) of the Act,\36\ 
which requires, among other things, that the Exchange's rules be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general, to protect investors and the public 
interest.
---------------------------------------------------------------------------

    \35\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \36\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    As noted above, the Fund may hold up to 100% Inflation Swaps and 
Other Derivatives \37\ in a manner that may not comply with the generic 
listing requirements in Rules 14.11(i)(4)(C)(iv)(a), 
14.11(i)(4)(C)(iv)(b), and 14.11(i)(4)(C)(v).\38\ The Exchange states 
that the Fund will only use those derivatives included in the defined 
term Inflation Hedging Instruments and Other Derivatives in order to 
attempt to mitigate the inflation risk of the U.S. dollar-denominated 
bonds to which the Fund will have exposure. The Exchange states that 
the Fund's use of derivative instruments will be collateralized. 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, NAV, 
IIV, rules governing the trading of equity securities, trading hours, 
trading halts, surveillance, firewalls, and the information circular.
---------------------------------------------------------------------------

    \37\ The Exchange states that the Fund's investments, including 
derivative instruments will be made in accordance with the 1940 Act 
and consistent with the Fund's investment objective and policies. To 
mitigate leveraging risk, the Fund will segregate or earmark liquid 
assets determined to be liquid by the Adviser in accordance with 
procedures established by the Trust's Board and in accordance with 
the 1940 Act to cover its obligations under derivative instruments.
    \38\ The Commission notes that it has previously approved other 
proposals to list and trade series of Managed Fund Shares based on a 
portfolio containing securities and instruments substantially 
similar to Bonds, Inflation Hedging Instruments, and Other 
Derivatives. See, e.g., Securities Exchange Act Release Nos. 76719 
(December 21, 2015), 80 FR 80859 (December 28, 2015) (NYSEArca-2015-
73) (order approving listing and trading of the Guggenheim Total 
Return ETF) and 77522 (April 5, 2016), 81 FR 21420 (April 11, 2016) 
(NYSEArca-2015-125) (order approving listing and trading of the 
RiverFront Dynamic Unconstrained Income ETF and RiverFront Dynamic 
Core Income ETF).
---------------------------------------------------------------------------

    The Exchange states that the Fund's Inflation Swaps and Other 
Derivatives will not meet the generic listing requirement that at least 
90% of the weight of the listed derivatives portion of the portfolio be 
in listed derivatives for which the Exchange may obtain information via 
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

[[Page 6030]]

surveillance sharing agreement. The Exchange represents 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. The Exchange also represents that all of the listed 
instruments that would not meet this requirement would nevertheless 
have a primary market that is a swap execution facility that is 
registered with and under the regulatory oversight of the CFTC.\39\
---------------------------------------------------------------------------

    \39\ See supra note 28.
---------------------------------------------------------------------------

    The Exchange states that the Fund's investments in Inflation Swaps 
and Other Derivatives will not meet the generic listing 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 and that the aggregate gross notional value 
of listed derivatives based on any single underlying reference asset 
not exceed 30% of the weight of the portfolio. The Exchange states that 
it believes the liquidity in the Treasury futures, Eurodollar futures, 
and TIPS markets mitigates manipulation concerns. The Exchange further 
believes that for listed swaps, including credit default swaps, 
interest rate swaps, and Inflation Swaps, the price transparency and 
surveillance performed by the applicable swap execution facility would 
similarly act to mitigate the risk of manipulation of the Shares. The 
Exchange also states that it believes that the size of the inflation 
swaps market, which would include all of the Inflation Swaps that the 
Fund intends to invest in, also mitigates manipulation concerns 
relating to both listed and OTC Inflation Swaps held by the Fund.
    The Exchange states that the Fund's holdings in OTC derivatives 
will exceed 20% of the weight of the portfolio and, therefore, not meet 
the generic listing requirements. The Exchange states that the Fund 
will attempt to limit counterparty risk in non-cleared OTC swaps and 
OTC Inflation Swaps and interest rate swaps by entering into such 
contracts only with counterparties the Adviser believes are 
creditworthy and by limiting the Fund's exposure to each counterparty, 
and that the Adviser will monitor the creditworthiness of each 
counterparty and the Fund's exposure to each counterparty on an ongoing 
basis. The Exchange states that the inflation swaps market, which would 
include all of the listed and OTC Inflation Swaps that the Fund intends 
to invest in, is large and liquid, which the Exchange believes 
mitigates the concerns the 20% limitation is intended to address.
    The Commission also finds that the proposal to list and trade the 
Shares on the Exchange is consistent with Section 11A(a)(1)(C)(iii) of 
the Act \40\ which sets forth Congress' finding that it is in the 
public interest and appropriate for the protection of investors and the 
maintenance of fair and orderly markets to assure the availability to 
brokers, dealers, and investors of information with respect to 
quotations for, and transactions in, securities. The Exchange 
represents that the intra-day, closing and settlement prices of 
exchange-traded portfolio assets, including exchange-listed Equity 
Holdings, ETFs, options, 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 both listed and OTC 
swaps, TIPS, 20% OTC Instruments, Bonds, Equity Holdings that are not 
exchange-listed, 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. Trade price and 
other information relating to municipal securities is available through 
the MSRB.
---------------------------------------------------------------------------

    \40\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
---------------------------------------------------------------------------

    In addition, the Disclosed Portfolio will be available on the 
issuer's website free of charge. The Fund's website includes a form of 
the prospectus for the Fund and additional information related to NAV 
and other applicable quantitative information. Information regarding 
market price and trading volume of the Shares will be continuously 
available throughout the day on brokers' computer screens and other 
electronic services. Quotation and last-sale information on the Shares 
will be available through the Consolidated Tape Association. 
Information regarding the previous day's closing price and trading 
volume for the Shares will be published daily in the financial section 
of newspapers. Quotation and last-sale information for listed options 
contracts cleared by the Options Clearing Corporation will be available 
via the Options Price Reporting Authority. Further, trading in the 
Shares may be halted for market conditions or for reasons that, in the 
view of the Exchange, make trading inadvisable. The Exchange deems the 
Shares to be equity securities, thus rendering trading in the Shares 
subject to the Exchange's existing rules governing the trading of 
equity securities. The Exchange represents that it has appropriate 
rules to facilitate trading in the Shares during all trading sessions.
    The Exchange has made the following representations in support of 
its proposal:

    (1) Other than BZX Rules 14.11(i)(4)(C)(iv)(a), 
14.11(i)(4)(C)(iv)(b), and 14.11(i)(4)(C)(v), the Fund will comply 
with all other requirements on an initial and continued listing 
basis for Managed Fund Shares under BZX Rule 14.11(i), including 
those requirements regarding the Disclosed Portfolio and the 
requirement that the Disclosed Portfolio and the NAV will be made 
available to all market participants at the same time,\41\ IIV,\42\ 
suspension of trading or removal,\43\ trading halts,\44\ 
disclosure,\45\ and firewalls.\46\
---------------------------------------------------------------------------

    \41\ See BZX Rules 14.11(i)(4)(A)(ii) and 14.11(i)(4)(B)(ii).
    \42\ See BZX Rule 14.11(i)(4)(B)(i).
    \43\ See BZX Rule 14.11(i)(4)(B)(iii).
    \44\ See BZX Rule 14.11(i)(4)(B)(iv).
    \45\ See BZX Rule 14.11(i)(6).
    \46\ See BZX Rule 14.11(i)(7).
---------------------------------------------------------------------------

    (2) Trading of the Shares on the Exchange will be subject to the 
Exchange's surveillance procedures for derivative products, 
including Managed Fund Shares, and these 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.
    (3) All of the ETFs, exchange-listed Equity Holdings, futures 
contracts, and listed options 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. 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 
TRACE and municipal securities reported to the MSRB's Electronic 
Municipal Market Access system. FINRA also can access data obtained 
from the MSRB relating to municipal bond trading activity for 
surveillance purposes in connection with trading in the Shares. The 
Exchange has a policy prohibiting the distribution of material, non-
public information by its employees.
    (4) Certain of the listed Inflation Swaps, listed credit default 
swaps, and listed interest rate 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, FINRA, on behalf of the Exchange, 
or both will communicate regarding trading in the Shares and in 
certain of the listed Inflation Swaps, credit default swaps, and 
listed interest rate swaps held by the Fund with the ISG, other 
markets or entities who are members or affiliates of the ISG, or 
with

[[Page 6031]]

which the Exchange has entered into a comprehensive surveillance 
sharing agreement.
    (5) Prior to the commencement of trading, the Exchange will 
inform its members in an Information Circular of the special 
characteristics and risks associated with trading the Shares. 
Specifically, the Information Circular will discuss the following: 
(a) The procedures for purchases and redemptions of Shares in 
Creation Units (and that Shares are not individually redeemable); 
(b) BZX Rule 3.7, which imposes suitability obligations on Exchange 
members with respect to recommending transactions in the Shares to 
customers; (c) how information regarding the IIV and the Disclosed 
Portfolio is disseminated; (d) the risks involved in trading the 
Shares during the Pre-Opening \47\ and After Hours Trading Sessions 
\48\ when an updated IIV will not be calculated or publicly 
disseminated; (e) the requirement that members deliver a prospectus 
to investors purchasing newly issued Shares prior to or concurrently 
with the confirmation of a transaction; and (f) trading information.
---------------------------------------------------------------------------

    \47\ The Pre-Opening Session is from 8:00 a.m. to 9:30 a.m. 
Eastern Time.
    \48\ The After Hours Trading Session is from 4:00 p.m. to 5:00 
p.m. Eastern Time.
---------------------------------------------------------------------------

    (6) The Fund's investments, including derivatives, will be 
consistent with the 1940 Act and the Fund's investment objective and 
policies and will not be used to enhance leverage (although certain 
derivatives and other investments may result in leverage).\49\
---------------------------------------------------------------------------

    \49\ See supra note 23.
---------------------------------------------------------------------------

    (7) 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).
    (8) Credit default swaps held by the Fund will be traded on a 
U.S. Swap Execution Facility registered with the CFTC. At least 90% 
of the Fund's net assets in credit default swaps will be investment-
grade at the time of purchase.
    (9) To the extent that the Fund holds listed Inflation Swaps or 
interest rate swaps, all such listed Inflation Swaps and listed 
interest rate swaps held by the Fund will be traded on a U.S. Swap 
Execution Facility registered with the CFTC.
    (10) The Trust is required to comply with Rule 10A-3 under the 
Act \50\ for the initial and continued listing of the Shares of the 
Fund, and at least 100,000 Shares will be outstanding upon the 
commencement of trading.
---------------------------------------------------------------------------

    \50\ See 17 CFR 240.10A-3.

    The Exchange represents that 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. In addition, 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 BZX Rule 14.12.
    This approval order is based on all of the Exchange's 
representations and descriptions of the Shares and the Fund, including 
those set forth above and in Amendment No. 1 to the proposed rule 
change. Except as described herein, the Commission notes that the 
Shares must comply with all applicable requirements of BZX Rule 
14.11(i) to be listed and traded on the Exchange on an initial and 
continuing basis.
    For the foregoing reasons, the Commission finds that the proposed 
rule change, as modified by Amendment No. 1, is consistent with Section 
11A(a)(1)(C)(iii) of the Act \51\ and Section 6(b)(5) of the Act \52\ 
and the rules and regulations thereunder applicable to a national 
securities exchange.
---------------------------------------------------------------------------

    \51\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \52\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\53\ that the proposed rule change (SR-CboeBZX-2018-077), as 
modified by Amendment No. 1, be, and it hereby is, approved.
---------------------------------------------------------------------------

    \53\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\54\
---------------------------------------------------------------------------

    \54\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-03175 Filed 2-22-19; 8:45 am]
BILLING CODE 8011-01-P