Document ID: SEC-2017-0700-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Bats BZX Exchange, Inc.
Posted Date: 2017-05-02T04:00Z

[Federal Register Volume 82, Number 83 (Tuesday, May 2, 2017)]
[Notices]
[Pages 20506-20508]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-08812]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80529; File No. SR-BatsBZX-2017-14]

Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Order 
Granting Approval of a Proposed Rule Change, as Modified by Amendment 
Nos. 3 and 5, To List and Trade Shares of the Amplify YieldShares Oil 
Hedged MLP Fund, a Series of the Amplify ETF Trust, Under BZX Rule 
14.11(i), Managed Fund Shares

April 26, 2017.

I. Introduction

    On February 17, 2017, Bats 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'' or ``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to list and trade shares 
(``Shares'') of the Amplify YieldShares Oil Hedged MLP Fund (``Fund''), 
a series of the Amplify ETF Trust (``Trust''). The proposed rule change 
was published for comment in the Federal Register on March 7, 2017.\3\ 
On March 30, 2017, the Exchange filed Amendment No. 2 to the proposed 
rule change.\4\ On April 7, 2017, the Exchange filed Amendment No. 3 to 
the proposed rule change,\5\ and on April 24, 2017, the Exchange filed 
Amendment No. 5 to the proposed rule change.\6\ The Commission received 
no comments on the proposed rule change. This order approves the 
proposed rule change, as modified by Amendment Nos. 3 and 5.
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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. 34-80136 (March 1, 
2017), 82 FR 12860.
    \4\ The Exchange filed and withdrew Amendment No. 1 on March 30, 
2017. Amendment No. 2 replaced the original filing in its entirety.
    \5\ In Amendment No. 3, which amended and replaced the proposed 
rule change, as modified by Amendment No. 2, in its entirety, the 
Exchange: (a) Added representations clarifying that the proposed 
rule change will constitute continued listing requirements for 
listing Shares on the Exchange; (b) added representations that the 
Fund will conform with certain requirements applicable to Managed 
Fund Shares; and (c) made other technical and clarifying amendments. 
Because Amendment No. 3 does not materially alter the substance of 
the proposed rule change or raise unique or novel regulatory issues, 
it is not subject to notice and comment. Amendment No. 3 is 
available at https://www.sec.gov/comments/sr-batsbzx-2017-14/batsbzx201714-1692102-149689.pdf.
    \6\ The Exchange filed Amendment No. 4 on April 19, 2017, and 
withdrew it on April 24, 2017. In Amendment No. 5, the Exchange: (1) 
Clarified how the composition of the Fund's holdings would be 
calculated; and (2) provided additional detail regarding the 
historical average daily contract volume for WTI Crude Oil Futures 
(as defined below). Because Amendment No. 5 does not materially 
alter the substance of the proposed rule change or raise unique or 
novel regulatory issues, it is not subject to notice and comment. 
Amendment No. 5 is available at https://www.sec.gov/comments/sr-batsbzx-2017-14/batsbzx201714-1719288-150433.pdf.
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II. Exchange's Description of the Proposal

    The Exchange proposes to list and trade the Shares under 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 is 
registered with the Commission as an investment company and has filed a 
Registration Statement on Form N-1A with the Commission.\7\
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    \7\ See Post-Effective Amendment No. 27 to Registration 
Statement on Form N-1A for the Trust, dated January 6, 2017 (File 
Nos. 333-207937 and 811-23108).
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    The Exchange states that the Fund will invest in equity securities 
of energy master limited partnerships (``MLPs'') and selectively hedge 
its positions to limit the correlation of its performance to the price 
of West Texas Intermediate Crude Oil (``WTI Crude Oil''). WTI Crude 
Oil, also known as Texas light sweet, is a grade of crude oil used as a 
benchmark in oil futures contracts pricing. According to the Exchange, 
the Fund will seek to exceed the performance of the Oil Hedged MLP 
Index (``Benchmark'') \8\ by actively selecting its investments from 
the underlying components of the Benchmark. The Exchange represents 
that the Fund is not an index tracking exchange-traded fund and is not 
required to invest in all of the components of the Benchmark. However, 
the Exchange states that generally, the Fund will seek to hold similar 
instruments to those in the Benchmark and will therefore invest in MLPs 
and short exposure oil futures contracts included in the Benchmark.
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    \8\ The Benchmark is developed, maintained, and sponsored by ETP 
Ventures LLC.
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    The Exchange represents that it submitted the proposal in order to 
allow the Fund to hold listed derivatives, specifically WTI Crude Oil 
futures traded on the New York Mercantile Exchange and ICE Futures 
Europe (``WTI Crude Oil Futures''), in a manner that would exceed the 
limitations of BZX Rule 14.11(i)(4)(C)(iv)(b), which prevents, among 
other things, a series of Managed Fund Shares from holding listed 
derivatives based on any single underlying reference asset in excess of 
30 percent of the weight of its portfolio (including gross notional 
exposures) (``30% Limitation'').\9\ Namely, the

[[Page 20507]]

Exchange proposes to allow the Fund to hold up to 50 percent of the 
weight of its portfolio (including gross notional exposures) in WTI 
Crude Oil Futures. Notwithstanding this, the Exchange also states that, 
in order to achieve its investment objective, under Normal Market 
Conditions,\10\ the Fund will invest at least 80 percent of its total 
assets in equity securities of MLPs and up to 20 percent of its total 
assets in fixed income securities, cash, and the cash value \11\ of 
futures positions.\12\ The Exchange notes that this is different than 
the calculation used to measure the Fund's holdings in WTI Crude Oil 
Futures as it relates to the Fund holding up to 50 percent of the 
weight of its portfolio, which includes gross notional exposures gained 
through the WTI Crude Oil Futures in both the numerator and 
denominator, which is consistent with the derivatives exposure 
calculation under BZX Rule 14.11(i)(4)(C)(iv).
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    \9\ BZX Rule 14.11(i)(4)(C)(iv)(b) requires that the aggregate 
gross notional value of listed derivatives based on any five or 
fewer underlying reference assets to 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 to not exceed 30% of the weight of 
the portfolio (including gross notional exposures). The Exchange 
states that the proposal is to allow the Fund to exceed the specific 
requirement of BZX 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). According to 
the Exchange, the Fund will meet the other requirement of BZX Rule 
14.11(i)(4)(C)(iv)(b).
    \10\ 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.
    \11\ The Exchange states that the cash value of futures 
positions is based on the value of the Fund's daily margin account 
with the applicable futures exchange(s).
    \12\ The Exchange states that the combination of MLPs, fixed 
income securities, cash, and the cash value of futures positions 
will constitute the entirety of the Fund's holdings.
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    According to the Exchange, allowing the Fund to hold a greater 
portion of its portfolio in WTI Crude Oil Futures than would be 
permitted under the 30% Limitation would reduce the Fund's operational 
burden, mitigate the Fund's dependency on holding over-the-counter 
(``OTC'') instruments, and reduce counter-party risk associated with 
holding OTC instruments. The Exchange notes that the Fund may also hold 
certain fixed income securities and cash and cash equivalents in 
compliance with BZX Rules 14.11(i)(4)(C)(ii) and (iii) in order to 
collateralize its derivatives positions.
    The Exchange represents that, except for the 30% Limitation, 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).

III. Discussion and Commission Findings

    After careful review, the Commission finds that the Exchange's 
proposal to list and trade the Shares, as modified by Amendment Nos. 3 
and 5, is consistent with the Exchange Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\13\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Exchange Act,\14\ 
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.
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    \13\ 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).
    \14\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that, according to the Exchange, the Shares 
will meet each of the initial and continued listing criteria in BZX 
Rule 14.11(i), with the exception of the 30% Limitation. According to 
the Exchange, the liquidity in the WTI Crude Oil Futures 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.\15\ In addition, 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 further represents that all of the 
futures contracts held by the Fund will trade on markets that are 
members of the Intermarket Surveillance Group (``ISG'') or affiliated 
with a member of ISG or with which the Exchange has in place a 
comprehensive surveillance sharing agreement. Moreover, the Exchange 
represents that it may obtain information regarding trading in the 
Shares and the underlying futures contracts held by the Fund via the 
ISG from other exchanges who are members or affiliates of the ISG or 
with which the Exchange has entered into a comprehensive surveillance 
sharing agreement.\16\
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    \15\ According to the Exchange, as of January 31, 2017, the 
average daily contract volume combined on the New York Mercantile 
Exchange and ICE Futures Europe over the last year was 558,353, 
307,289, and 110,208, respectively, for the front, second, and third 
month WTI Crude Oil Futures contracts. At today's price levels, that 
equates to an average daily traded notional of approximately $29.4 
billion, $16.2 billion, and $5.8 billion for the first, second, and 
third month contracts, respectively.
    \16\ For a list of the current members and affiliate members of 
ISG, see www.isgportal.com. The Exchange notes that not all 
components of the Disclosed Portfolio for the Fund may trade on 
markets that are members of ISG or with which the Exchange has in 
place a comprehensive surveillance sharing agreement.
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    The Exchange states that 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. The Exchange further 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,\17\ 
net asset value, and the Intraday Indicative Value,\18\ and 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.
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    \17\ See BZX Rule 14.11(i)(4)(B)(ii).
    \18\ See BZX Rule 14.11(i)(4)(B)(i).
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    The Exchange represents that all statements and representations 
made in the filing regarding (a) the description of the portfolio, (b) 
limitations on portfolio holdings or reference assets, or (c) the 
applicability of Exchange rules shall constitute continued listing 
requirements for listing the Shares on the Exchange. 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 description of the Fund, including those set forth 
above and in Amendment Nos. 3 and 5 to the proposed rule change.

[[Page 20508]]

The Commission notes that the Shares must comply with the requirements 
of BZX Rule 14.11(i), other than the 30% Limitation, 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 Nos. 3 and 5, is consistent with 
Section 6(b)(5) of the Exchange Act \19\ and the rules and regulations 
thereunder applicable to a national securities exchange.
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    \19\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\20\ that the proposed rule change (SR-BatsBZX-2017-14), 
as modified by Amendment Nos. 3 and 5, be, and it hereby is, approved.
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    \20\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-08812 Filed 5-1-17; 8:45 am]
 BILLING CODE 8011-01-P