Document ID: SEC-2020-1524-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe BZX Exchange, Inc.
Posted Date: 2020-09-23T04:00Z

[Federal Register Volume 85, Number 185 (Wednesday, September 23, 2020)]
[Notices]
[Pages 59836-59843]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-20938]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89901; File No. SR-CboeBZX-2020-070]

Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change To List and Trade Shares of the -1x 
Short VIX Futures ETF, a Series of VS Trust, Under Rule 14.11(f)(4) 
(``Trust Issued Receipts'')

September 17, 2020.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on September 4, 2020, Cboe BZX Exchange, Inc. (``Exchange'' or ``BZX'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III 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

    Cboe BZX Exchange, Inc. (the ``Exchange'' or ``BZX'') is filing 
with the Securities and Exchange Commission (``Commission'') a proposed 
rule change to list and trade shares of the -1x Short VIX Futures ETF, 
a series of VS Trust,

[[Page 59837]]

under Rule 14.11(f)(4) (``Trust Issued Receipts'').
    The text of the proposed rule change is also available on the 
Exchange's website (http://markets.cboe.com/us/equities/regulation/rule_filings/bzx/), at the Exchange's Office of the Secretary, 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 aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    This Amendment No. 3 to SR-CboeBZX-2020-003 amends and replaces in 
its entirety the proposal as amended by Amendment No. 2, which was 
submitted on April 13, 2020, and amended and replaced in its entirety 
the proposal as amended by Amendment No. 1, which was submitted on 
March 24, 2020. The original proposal, submitted on January 3, 2020, 
was amended and replaced in its entirety by Amendment No. 1. The 
Exchange submits this Amendment No. 3 in order to clarify certain 
points and add additional details to the proposal.
    The Exchange proposes to list and trade Shares of the -1x Short VIX 
Futures ETF (the ``Fund'') under Rule 14.11(f)(4), which governs the 
listing and trading of Trust Issued Receipts \3\ on the Exchange.\4\
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    \3\ Rule 14.11(f)(4) applies to Trust Issued Receipts that 
invest in ``Financial Instruments.'' The term ``Financial 
Instruments,'' as defined in Rule 14.11(f)(4)(A)(iv), means 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.
    \4\ The Commission approved BZX Rule 14.11(f)(4) in Securities 
Exchange Act Release No. 68619 (January 10, 2013), 78 FR 3489 
(January 16, 2013) (SR-BZX-2012-044).
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    The Fund seeks to provide daily investment results (before fees and 
expenses), as further described below, that correspond to the 
performance of a benchmark that seeks to offer short exposure to market 
volatility through publicly traded futures markets. The benchmark for 
the Fund is the Short VIX Futures Index (the ``Index'' or ticker symbol 
SHORTVOL).\5\ The Index measures the daily inverse (i.e., the opposite) 
performance of a theoretical portfolio of first- and second-month 
futures contracts on the Cboe Volatility Index (``VIX'').\6\
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    \5\ The Index is sponsored by Cboe Global Indexes (the ``Index 
Sponsor''). The Index Sponsor is not a registered broker-dealer, but 
is affiliated with a broker-dealer. The Index Sponsor has 
implemented and will maintain a fire wall with respect to the 
broker-dealer affiliate regarding access to information concerning 
the composition and/or changes to the Index. In addition, the Index 
Sponsor has implemented and will maintain procedures that are 
designed to prevent the use and dissemination of material, non-
public information regarding the Index.
    \6\ The VIX is an index designed to measure the implied 
volatility of the S&P 500 over 30 days in the future. The VIX is 
calculated based on the prices of certain put and call options on 
the S&P 500. The VIX is reflective of the premium paid by investors 
for certain options linked to the level of the S&P 500.
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    The Fund will primarily invest in VIX futures contracts traded on 
the Cboe Futures Exchange, Inc. (``CFE'') (hereinafter referred to as 
``VIX Futures Contracts'') based on components of the Index to pursue 
its investment objective. In the event accountability rules, price 
limits, position limits, margin limits or other exposure limits are 
reached with respect to VIX Futures Contracts, Volatility Shares LLC 
(the ``Sponsor'') may cause the Fund to obtain exposure to the Index 
through Over-the-Counter (OTC) swaps referencing the Index or 
particular VIX Futures Contracts comprising the Index (hereinafter 
referred to as ``VIX Swap Agreements''). The Fund may also invest in 
VIX Swap Agreements if the market for a specific VIX Futures Contract 
experiences emergencies (e.g., natural disaster, terrorist attack or an 
act of God) or disruptions (e.g., a trading halt or a flash crash) or 
in situations where the Sponsor deems it impractical or inadvisable to 
buy or sell VIX Futures Contracts (such as during periods of market 
volatility or illiquidity).
    The Sponsor, a Delaware limited liability company, serves as the 
Sponsor of VS Trust (the ``Trust''). The Sponsor is a commodity pool 
operator.\7\ Tidal ETF Services LLC serves as the administrator (the 
``Administrator'') and U.S. Bank National Association serves as 
custodian of the Fund and its Shares. U.S. Bancorp Fund Services, LLC 
serves as the sub-administrator (the ``Sub-Administrator'') and 
transfer agent. Wilmington Trust Company, a Delaware trust company, is 
the sole trustee of the Trust.
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    \7\ The Fund has filed a draft registration statement on Form S-
1 under the Securities Act of 1933, dated December 6, 2019 (File No. 
377-02945) (``Draft Registration Statement''). The description of 
the Fund and the Shares contained herein are based on the Draft 
Registration Statement. The Fund will not trade on the Exchange 
until such time as there is an effective registration statement for 
the Fund.
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    If the Sponsor to the Trust issuing the Trust Issued Receipts is 
affiliated with a broker-dealer, such Sponsor to the Trust shall erect 
and maintain a ``fire wall'' between the Sponsor and the broker-dealer 
with respect to access to information concerning the composition and/or 
changes to the Fund's portfolio. The Sponsor is not a broker-dealer or 
affiliated with a broker-dealer. In the event that (a) the Sponsor 
becomes a broker-dealer or newly affiliated with a broker-dealer, or 
(b) any new sponsor is a 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 
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 the portfolio.
    The VIX Swap Agreements in which the Fund may invest may be cleared 
or non-cleared. The Fund will collateralize its obligations with Cash 
and Cash Equivalents \8\ consistent with the 1940 Act and 
interpretations thereunder.
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    \8\ For purposes of this proposal, the term ``Cash and Cash 
Equivalents'' shall have the definition provided in Exchange Rule 
14.11(i)(4)(C)(iii), applicable to Managed Fund Shares.
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    The Fund will only enter into VIX Swap Agreements with 
counterparties that the Sponsor reasonably believes are capable of 
performing under the contract and will post as collateral as required 
by the counterparty. The Fund will seek, where possible, to use 
counterparties, as applicable, whose financial status is such that the 
risk of default is reduced; however, the risk of losses resulting from 
default is still possible. The Sponsor will evaluate the 
creditworthiness of counterparties on a regular basis. In addition to 
information provided by credit agencies, the Sponsor will review 
approved counterparties using various factors, which may include the 
counterparty's reputation, the Sponsor's past experience with the 
counterparty and the price/market actions of debt of the counterparty.
    The Fund may use various techniques to minimize OTC counterparty 
credit risk including entering into arrangements with its 
counterparties whereby both sides exchange collateral

[[Page 59838]]

on a mark-to-market basis. Collateral posted by the Fund to a 
counterparty in connection with uncleared VIX Swap Agreements is 
generally held for the benefit of the counterparty in a segregated tri-
party account at the custodian to protect the counterparty against non-
payment by the Fund.
    In addition to VIX Swap Agreements, if the Fund is unable to meet 
its investment objective through investments in VIX Futures Contracts, 
the Fund may also obtain exposure to the Index through listed VIX 
options contracts traded on the Cboe Exchange, Inc. (``Cboe'') 
(hereinafter referred to as ``VIX Options Contracts'').
    The Fund may also invest in Cash and Cash Equivalents that may 
serve as collateral in the above referenced VIX Futures Contracts, VIX 
Swap Agreements, and VIX Option Contracts (collectively referred to as 
the ``VIX Derivative Products'').
    If the Fund is successful in meeting its objective, its value 
(before fees and expenses) on a given day should gain approximately as 
much on a percentage basis as the level of the Index when it rises. 
Conversely, its value (before fees and expenses) should lose 
approximately as much on a percentage basis as the level of the Index 
when it declines. The Fund primarily acquires short exposure to the VIX 
through VIX Futures Contracts, such that the Fund has exposure intended 
to approximate the Index at the time of the net asset value (``NAV'') 
calculation of the Fund. However, as discussed above, in the event that 
the Fund is unable to meet its investment objective solely through the 
investment of VIX Futures Contracts, it may invest in VIX Swap 
Agreements or VIX Options Contracts. The Fund may also invest in Cash 
or Cash Equivalents that may serve as collateral to the Fund's 
investments in VIX Derivative Products.
    The Fund is not actively managed by traditional methods, which 
typically involve effecting changes in the composition of a portfolio 
on the basis of judgments relating to economic, financial and market 
considerations with a view toward obtaining positive results under all 
market conditions. Rather, the Fund seeks to remain fully invested at 
all times in VIX Derivative Products (and Cash and Cash Equivalents as 
collateral) \9\ that provide exposure to the Index consistent with its 
investment objective without regard to market conditions, trends or 
direction.
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    \9\ Supra note 6.
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    In seeking to achieve the Fund's investment objective, the Sponsor 
uses a mathematical approach to investing. Using this approach, the 
Sponsor determines the type, quantity and mix of investment positions 
that the Sponsor believes in combination should produce daily returns 
consistent with the Fund's objective. The Sponsor relies upon a pre-
determined model to generate orders that result in repositioning the 
Fund's investments in accordance with its investment objective.
VIX Futures Contracts
    The Index is comprised of, and the value of the Fund will be based 
on, VIX Futures Contracts. VIX Futures Contracts are measures of the 
market's expectation of the level of VIX at certain points in the 
future, and as such will behave differently than current, or spot, VIX, 
as illustrated below.
    While the VIX represents a measure of the current expected 
volatility of the S&P 500 over the next 30 days, the prices of VIX 
Futures Contracts are based on the current expectation of what the 
expected 30-day volatility will be at a particular time in the future 
(on the expiration date). For example, a VIX Futures Contract purchased 
in March that expires in May, in effect, is a forward contract on what 
the level of the VIX, as a measure of 30-day implied volatility of the 
S&P 500, will be on the May expiration date. The forward volatility 
reading of the VIX may not correlate directly to the current volatility 
reading of the VIX because the implied volatility of the S&P 500 at a 
future expiration date may be different from the current implied 
volatility of the S&P 500. As a result, the Index and the Fund should 
be expected to perform very differently from the inverse of the VIX 
over all periods of time. To illustrate, on December 4, 2019, the VIX 
closed at a price of 14.8 and the price of the February 2020 VIX 
Futures Contracts expiring on February 19, 2020 was 18.125. In this 
example, the price of the VIX represented the 30-day implied, or 
``spot,'' volatility (the volatility expected for the period from 
December 5, 2019 to January 5, 2020) of the S&P 500 and the February 
VIX Futures Contracts represented forward implied volatility (the 
volatility expected for the period from February 19 to March 19, 2020) 
of the S&P 500.
Short VIX Futures Index
    The Index is designed to express the daily inverse performance of a 
theoretical portfolio of first- and second-month VIX Futures Contracts 
(the ``Index Components''), with the price of each VIX Futures Contract 
reflecting the market's expectation of future volatility. The Index 
seeks to reflect the returns that are potentially available from 
holding an unleveraged short position in first- and second- month VIX 
Futures Contracts. While the Index does not correspond to the inverse 
of the VIX, as it seeks short exposure to VIX, the value of the Index, 
and by extension the Fund, will generally rise as the VIX falls and 
fall as the VIX rises. Further, as described above, because VIX Futures 
Contracts correlate to future volatility readings of VIX, while the VIX 
itself correlates to current volatility, the Index and the Fund should 
be expected to perform significantly different from the inverse of the 
VIX.
    Unlike the Index, the VIX, which is not a benchmark for the Fund, 
is calculated based on the prices of put and call options on the S&P 
500, which are traded exclusively on Cboe.
Calculation of the Index
    The Index employs rules for selecting the Index Components and a 
formula to calculate a level for the Index from the prices of these 
components. Specifically, the Index Components represent the prices of 
the two near-term VIX Futures Contracts, replicating a position that 
rolls the nearest month VIX Futures Contract to the next month VIX 
Futures Contract on a daily basis in equal fractional amounts. This 
results in a constant weighted average maturity of approximately one 
month. The roll period usually begins on the Wednesday falling 30 
calendar days before the S&P 500 option expiration for the following 
month (the ``Cboe VIX Monthly Futures Settlement Date''), and runs to 
the Tuesday prior to the subsequent month's Cboe VIX Monthly Futures 
Settlement Date.
    The level of the Index will be published at least every 15 seconds 
both in real time from 9:30 a.m. to 4 p.m. ET and at the close of 
trading on each Business Day \10\ by Bloomberg and Reuters.
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    \10\ A ``Business Day'' means any day other than a day when any 
of BZX, Cboe, CFE or other exchange material to the valuation or 
operation of the Fund, or the calculation of the VIX, options 
contracts underlying the VIX, VIX Futures Contracts or the Index is 
closed for regular trading.
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Mitigating Price Impacts to VIX Futures Contract Prices at Times of 
Fund Rebalancing
    The Fund's investment objective is a daily investment objective; 
that is, the Fund seeks to track the Index on a daily basis, not over 
longer periods. Accordingly, each day, the Fund will position its 
portfolio so that it can seek to track the Index. The direction and 
extent of the Index's movements each day will dictate the direction and 
extent of the Fund's portfolio rebalancing. For

[[Page 59839]]

example, if the level of the Index falls on a given day, net assets of 
the Fund would fall. As a result, exposure to the Index, through 
futures positions held by the Fund, would need to be decreased. The 
opposite would be the case if the level of the Index rises on a given 
day.
    The time and manner in which the Fund rebalances its portfolio is 
defined by the Index methodology but may vary from the Index 
methodology depending upon market conditions and other circumstances 
including the potential impact of the rebalance on the price of the VIX 
futures contracts. The Sponsor will seek to minimize the market impact 
of Fund rebalances on the price of VIX futures contracts by limiting 
the Fund's participation, on any given day, in VIX futures contracts to 
no more than one-quarter of the contracts traded on Cboe Futures 
Exchange (the ``CFE'') during any Rebalance Period (defined by the 
Index methodology as 3:45 p.m.-4 p.m. ET). If the Fund's portfolio 
rebalance exceeds one-quarter of the futures' volume between 3:45 p.m. 
and 4 p.m. ET, the Sponsor will extend the rebalance period (the 
``Extended Rebalance Period) to include, for example, the period 
between 4 p.m. and 4:15 p.m. ET and the Trade At Settlement market 
(``TAS'').
    The Sponsor expects that allowing the Fund to participate in an 
Extended Rebalance Period will minimize the impact on the price of VIX 
futures contracts, and particularly minimize any impact of large Fund 
rebalances during periods of market illiquidity.\11\ Accordingly, by 
defining an explicit rebalancing methodology and limiting the Fund's 
participation in the VIX futures contracts should reduce the impact of 
the Fund's rebalancing on the price of VIX futures contracts.
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    \11\ Research on the impact of the portfolio rebalancing of VIX 
Exchange Traded Products (``VIX ETPs'') on VIX futures' prices 
suggests that large rebalancing trades from inverse and leveraged 
VIX ETPs have a smaller than expected price impact on VIX futures. 
See Br[oslash]gger, S.B., The Market Impact of Uninformed Flows: 
Evidence from the VIX Futures Market (2019). Available at: SSRN 
3497537. This has been explained as resulting from the 
predictability of rebalancing flows from large VIX ETPs being priced 
into the VIX futures. See Todorov, K., Passive Funds Actively Affect 
Prices: Evidence from the Largest ETF Markets (2019). Unpublished 
working paper, London School of Economics. Further research shows 
that the presence of ETF flow in an underlying market actually 
improves underlying liquidity. In that study they found bid-ask 
spreads to be narrower, order book deeper, and market resiliency 
larger on days when ETFs performed a rebalance, finding that this 
increased liquidity stemmed from a larger number of trading accounts 
that supplied liquidity to exploit the predictable order flow from 
rebalancing ETFs. Accordingly, one can assume that liquidity in VIX 
futures contracts during the Fund's rebalancing period will be 
expected to grow, and this will reduce the fraction of the trading 
activity that the Fund's rebalance will contribute to the VIX 
futures market. Bessembinder, H., Carrion, A., Tuttle, L. and 
Venkataraman, K., Liquidity, Resiliency and Market Quality Around 
Predictable Trades: Theory and Evidence. Journal of Financial 
Economics, 121(1) (2016), pp.142-166.
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    The Sponsor believes that the Fund would enter an Extended 
Rebalance Period most often during periods of extraordinary volatility 
or illiquidity in VIX futures contracts. For example, in surveying the 
two most volatile months in recent history--February 2018 and March 
2020--and assuming a size equal to the largest previously achieved by 
an inverse VIX ETP ($1.9 billion--Symbol: XIV on February 1, 2018), the 
Fund would have exceeded one-quarter of the trading volume of VIX 
futures contracts during the Rebalance Period for seven days in 
February 2018 and for five days in March 2020. Having the Fund 
participate in an Extended Rebalance Period on those days would have 
resulted in a maximum participation in VIX futures contracts over the 
Extended Rebalance Period of 14.1% in February 2018 and 12.6% in March 
2020.
Purchases and Redemptions of Creation Units
    The Fund will create and redeem Shares from time to time only in 
large blocks of a specified number of Shares or multiples thereof 
(``Creation Units''). A Creation Unit is a block of at least 10,000 
Shares. Except when aggregated in Creation Units, the Shares are not 
redeemable securities.
    On any Business Day, an authorized participant may place an order 
with the Sub-Administrator to create one or more Creation Units.\12\ 
The total cash payment required to create each Creation Unit is the NAV 
of at least 10,000 Shares of the Fund on the purchase order date plus 
the applicable transaction fee.
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    \12\ Authorized participants have a cut-off time of 2:00 p.m. ET 
to place creation and redemption orders.
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    The procedures by which an authorized participant can redeem one or 
more Creation Units mirror the procedures for the purchase of Creation 
Units. On any Business Day, an authorized participant may place an 
order with the Sub-Administrator to redeem one or more Creation Units. 
The redemption proceeds from the Fund consist of the cash redemption 
amount. The cash redemption amount is equal to the NAV of the number of 
Creation Unit(s) of the Fund requested in the authorized participant's 
redemption order as of the time of the calculation of a Fund's NAV on 
the redemption order date, less transaction fees.
Availability of Information Regarding the Shares
    The NAV for the Fund's Shares will be calculated by the Sub-
Administrator once each Business Day and will be disseminated daily to 
all market participants at the same time.\13\ Pricing information for 
the Shares will be available on the Fund's website at 
www.volatilityshares.com, including: (1) The prior Business Day's 
reported NAV, the closing market price or the bid/ask price, daily 
trading volume, and a calculation of the premium and discount of the 
closing market price or bid/ask price against the NAV; and (2) data in 
chart format displaying the frequency distribution of discounts and 
premiums of the daily closing price against the NAV, within appropriate 
ranges, for each of the four previous calendar quarters.
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    \13\ NAV means the total assets of the Fund including, but not 
limited to, all Cash and Cash Equivalents or other debt securities 
less total liabilities of the Fund, consistently applied under the 
accrual method of accounting. The Fund's NAV is calculated at 4 p.m. 
ET.
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    The closing prices and settlement prices of the Index Components 
(i.e., the first- and second-month VIX Futures Contracts) will also be 
readily available from the websites of CFE (http://www.cfe.cboe.com), 
automated quotation systems, published or other public sources, or on-
line information services such as Bloomberg or Reuters. Complete real-
time data for component VIX Futures Contracts underlying the Index is 
available by subscription from Reuters and Bloomberg. Specifically, the 
level of the Index will be published at least every 15 seconds both in 
real time from 9:30 a.m. to 4 p.m. ET and at the close of trading on 
each Business Day by Bloomberg and Reuters. The CFE also provides 
delayed futures information on current and past trading sessions and 
market news free of charge on its website. The specific contract 
specifications of Index Components (i.e., first-month and second-month 
VIX Futures Contracts) underlying the Index are also available on 
Bloomberg and Reuters.
    Quotation and last-sale information regarding the Shares will be 
disseminated through the facilities of the Consolidated Tape 
Association (``CTA''). Quotation and last-sale information regarding 
VIX Futures Contracts and VIX Options Contracts will be available from 
the exchanges on which such instruments are traded. Quotation and last-
sale information relating to VIX Options Contracts will also be 
available via the Options Price Reporting Authority. Quotation and 
last-

[[Page 59840]]

sale information for VIX Swap Agreements will be available from 
nationally recognized data services providers, such as Reuters and 
Bloomberg, through subscription agreements or from a broker-dealer who 
makes markets in such instruments. Quotation and last-sale information 
for VIX Swap Agreements will be valued on the basis of quotations or 
equivalent indication of value supplied by a third- party pricing 
service or broker-dealer who makes markets in such instruments. Pricing 
information regarding Cash Equivalents in which the Fund will invest is 
generally available through nationally recognized data services 
providers, such as Reuters and Bloomberg, through subscription 
agreements.
    In addition, the Fund's website at www.volatilityshares.com will 
display the end of day closing Index level, and NAV per Share for the 
Fund. The Fund will provide website disclosure of portfolio holdings 
daily and will include, as applicable, the notional value (in U.S. 
dollars) of VIX Derivative Products, and characteristics of such 
instruments, as well as Cash and Cash Equivalents held in the portfolio 
of the Fund. This website disclosure of the portfolio composition of 
the Fund will occur at the same time as the disclosure by the Fund of 
the portfolio composition to authorized participants so that all market 
participants are provided portfolio composition information at the same 
time. The same portfolio information will be provided on the public 
website as well as in electronic files provided to authorized 
participants.
    In addition, in order to provide updated information relating to 
the Fund for use by investors and market professionals, an updated 
Intraday Indicative Value (``IIV'') will be calculated. The IIV is an 
indicator of the value of the Fund's holdings, which include the VIX 
Derivative Products and Cash and Cash Equivalents less liabilities of 
the Fund at the time the IIV is disseminated. The IIV will be 
calculated and widely disseminated by one or more major market data 
vendors every 15 seconds throughout Regular Trading Hours.\14\
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    \14\ As defined in Rule 1.5(w), the term ``Regular Trading 
Hours'' means the time between 9:30 a.m. and 4 p.m. ET.
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    In addition, the IIV will be published on the Exchange's website 
and will be available through on-line information services such as 
Bloomberg and Reuters.
    The IIV disseminated during Regular Trading Hours should not be 
viewed as an actual real time update of the NAV, which is calculated 
only once a day. The IIV also should not be viewed as a precise value 
of the Shares.
    Additional information regarding the Fund and the Shares, including 
investment strategies, risks, creation and redemption procedures, fees, 
portfolio holdings, disclosure policies, distributions and taxes will 
be included in the registration statement.
Initial and Continued Listing
    The Shares of the Fund will conform to the initial and continued 
listing criteria under BZX Rule 14.11(f)(4). The Exchange represents 
that, for initial and continued listing, the Fund and the Trust must be 
in compliance with Rule 10A-3 under the Act. A minimum of 100,000 
Shares of the Fund will be outstanding at the commencement of trading 
on the Exchange. The Exchange will obtain a representation from the 
Sponsor of the Shares that the NAV per Share for the Fund will be 
calculated daily and will be made available to all market participants 
at the same time.
Trading Halts
    With respect to trading halts, the Exchange may consider all 
relevant factors in exercising its discretion to halt or suspend 
trading in the Shares of the Fund. The Exchange will halt trading in 
the Shares under the conditions specified in BZX Rule 11.18. Trading 
may be halted because of market conditions or for reasons that, in the 
view of the Exchange, make trading in the Shares inadvisable. These may 
include: (1) The extent to which trading is not occurring in the 
securities and/or the financial instruments composing the daily 
disclosed portfolio of the Fund; or (2) whether other unusual 
conditions or circumstances detrimental to the maintenance of a fair 
and orderly market are present.
Trading Rules
    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 will 
allow trading in the Shares from 8:00 a.m. until 8:00 p.m. ET and has 
the appropriate rules to facilitate transactions in the Shares during 
all trading sessions. As provided in BZX Rule 11.11(a), the minimum 
price variation for quoting and entry of orders in securities traded on 
the Exchange is $0.01, with the exception of securities that are priced 
less than $1.00, for which the minimum price variation for order entry 
is $0.0001.
Surveillance
    Trading of the Shares through the Exchange will be subject to the 
Exchange's surveillance procedures for derivative products, including 
Trust Issued Receipts. All of the VIX Futures Contracts and VIX 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.\15\ The 
Exchange, FINRA, on behalf of the Exchange, or both will communicate 
regarding trading in the Shares and the underlying listed instruments, 
including listed derivatives held by the Fund, with the ISG, other 
markets or entities who are members or affiliates of the ISG, or with 
which the Exchange has entered into a comprehensive surveillance 
sharing agreement. In addition, the Exchange, FINRA, on behalf of the 
Exchange, or both may obtain information regarding trading in the 
Shares and the underlying listed instruments, including listed 
derivatives, held by the Fund from markets and other entities that are 
members of ISG or with which the Exchange has in place a comprehensive 
surveillance sharing agreement. The Exchange also has a general policy 
prohibiting the distribution of material, non-public information by its 
employees. All statements and representations made in this filing 
regarding the Index composition, description of the portfolio or 
reference assets, limitations on portfolio holdings or reference 
assets, dissemination and availability of reference the Index, 
reference asset, and IIV, 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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    \15\ 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 Fund's holdings 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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[[Page 59841]]

Information Circular
    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: (1) The procedures for purchases 
and redemptions of Shares in Creation Units (and that Shares are not 
individually redeemable); (2) BZX Rule 3.7, which imposes suitability 
obligations on Exchange members with respect to recommending 
transactions in the Shares to customers; (3) Interpretation and Policy 
.01 of BZX Rule 3.7 which imposes a duty of due diligence on its 
Members to learn the essential facts relating to every customer prior 
to trading the Shares; \16\ (4) how information regarding the IIV and 
the Fund's holdings is disseminated; (5) the risks involved in trading 
the Shares during the Pre-Opening \17\ and After Hours Trading Sessions 
\18\ when an updated IIV will not be calculated or publicly 
disseminated; (6) the requirement that members deliver a prospectus to 
investors purchasing newly issued Shares prior to or concurrently with 
the confirmation of a transaction; and (7) trading information.
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    \16\ Specifically, in part, Interpretation and Policy .01 of 
Rule 3.7 states ``[n]o Member shall recommend to a customer a 
transaction in any such product unless the Member has a reasonable 
basis for believing at the time of making the recommendation that 
the customer has such knowledge and experience in financial matters 
that he may reasonably be expected to be capable of evaluating the 
risks of the recommended transaction and is financially able to bear 
the risks of the recommended position.
    \17\ The Pre-Opening Session is from 8:00 a.m. to 9:30 a.m. ET.
    \18\ The After Hours Trading Session is from 4 p.m. to 8:00 p.m. 
ET.
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    Further, the Exchange states that FINRA has implemented increased 
sales practice and customer margin requirements for FINRA members 
applicable to inverse, leveraged and inversed leveraged securities 
(which include the Shares) and options on such securities, as described 
in FINRA Regulatory Notices 09-31 (June 2009), 09-53 (August 2009), and 
09-65 (November 2009) (collectively, ``FINRA Regulatory Notices''). 
Members that carry customer accounts will be required to follow the 
FINRA guidance set forth in these notices. As noted above, the Fund 
will seek daily investment results, before fees and expenses, that 
correspond to the Index, which measures daily inverse performance of a 
theoretical portfolio of first- and second-month futures contracts on 
the VIX. The Fund does not seek to achieve its primary investment 
objective over a period of time greater than a single day. The return 
of the Fund for a period longer than a single day is the result of its 
return for each day compounded over the period and usually will differ 
in amount and possibly even direction from either the inverse of the 
VIX or the inverse of a portfolio of short-term VIX Futures Contracts 
for the same period. These differences can be significant.
    In addition, the Information Circular will advise members, prior to 
the commencement of trading, of the prospectus delivery requirements 
applicable to the Fund. Members purchasing Shares from the Fund for 
resale to investors will deliver a prospectus to such investors. The 
Information Circular will also discuss any exemptive, no-action and 
interpretive relief granted by the Commission from any rules under the 
Act.
    In addition, the Information Circular will reference that the Fund 
is subject to various fees and expenses described in the Fund's 
registration statement. The Information Circular will also disclose the 
trading hours of the Shares of the Fund and the applicable NAV 
calculation time for the Shares. The Information Circular will disclose 
that information about the Shares of the Fund will be publicly 
available on the Fund's website.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with Section 
6(b) of the Act \19\ in general and Section 6(b)(5) of the Act \20\ 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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    \19\ 15 U.S.C. 78f.
    \20\ 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 in that the 
Shares will be listed and traded on the Exchange pursuant to the 
initial and continued listing criteria in Exchange Rule 14.11(f). 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. If the Sponsor to the Trust 
issuing the Trust Issued Receipts is affiliated with a broker-dealer, 
such Sponsor to the Trust shall erect and maintain a ``fire wall'' 
between the Sponsor and the broker-dealer with respect to access to 
information concerning the composition and/or changes to the Fund's 
portfolio. The Sponsor is not a broker-dealer or affiliated with a 
broker-dealer. In the event that (a) the Sponsor becomes a broker-
dealer or newly affiliated with a broker-dealer, or (b) any new sponsor 
is a 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 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 the 
portfolio. The Exchange, FINRA, on behalf of the Exchange, or both may 
obtain information regarding trading in the Shares and the underlying 
VIX Futures Contracts and VIX Options Contracts 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. In addition, the Exchange also has a general policy 
prohibiting the distribution of material, non-public information by its 
employees.
    The proposed rule change is designed to promote just and equitable 
principles of trade and to protect investors and the public interest in 
that the Exchange will obtain a representation from the issuer of the 
Shares that the NAV will be calculated daily and that the NAV and the 
Fund's holdings will be made available to all market participants at 
the same time. In addition, a large amount of information is publicly 
available regarding the Fund and the Shares, thereby promoting market 
transparency. Moreover, the IIV will be disseminated by one or more 
major market data vendors at least every 15 seconds during Regular 
Trading Hours. On each Business Day, before commencement of trading in 
Shares during Regular Trading Hours, the Fund will disclose on its 
website the holdings that will form the basis for the Fund's 
calculation of NAV at the end of the Business Day. Pricing information 
will be available on the Fund's website including: (1) The prior 
Business Day's reported NAV, the closing market price or the bid/ask 
price, daily trading

[[Page 59842]]

volume, and a calculation of the premium and discount of the closing 
market price or bid/ask price against the NAV; and (2) data in chart 
format displaying the frequency distribution of discounts and premiums 
of the daily closing price against the NAV, within appropriate ranges, 
for each of the four previous calendar quarters. Additionally, 
information regarding market price and trading of the Shares will be 
continually available on a real-time basis throughout the day on 
brokers' computer screens and other electronic services, and quotation 
and last sale information for the Shares will be available on the 
facilities of the CTA. The website for the Fund will include a form of 
the prospectus for the Fund and additional data relating to NAV and 
other applicable quantitative information. Trading in Shares of the 
Fund will be halted under the conditions specified in Exchange Rule 
11.18. Trading may also be halted because of market conditions or for 
reasons that, in the view of the Exchange, make trading in the Shares 
inadvisable. Finally, trading in the Shares will be subject to 
14.11(f)(4)(C)(ii), which sets forth circumstances under which Shares 
of the Fund may be halted. In addition, as noted above, investors will 
have ready access to information regarding the Fund's holdings, the 
IIV, and quotation and last sale information for the Shares.
    Quotation and last-sale information regarding the Shares will be 
disseminated through the facilities of the CTA. Quotation and last-sale 
information regarding VIX Futures Contracts and VIX Options Contracts 
will be available from the exchanges on which such instruments are 
traded. Quotation and last-sale information relating to VIX Options 
Contracts will also be available via the Options Price Reporting 
Authority. Quotation and last-sale information for VIX Swap Agreements 
will be available from nationally recognized data services providers, 
such as Reuters and Bloomberg, through subscription agreements or from 
a broker-dealer who makes markets in such instruments. Quotation and 
last-sale information for VIX Swap Agreements will be valued on the 
basis of quotations or equivalent indication of value supplied by a 
third- party pricing service or broker-dealer who makes markets in such 
instruments. Pricing information regarding Cash Equivalents in which 
the Fund will invest is generally available through nationally 
recognized data services providers, such as Reuters and Bloomberg, 
through subscription agreements.
    Fund's investment objective is a daily investment objective; that 
is, the Fund seeks to track the Index on a daily basis, not over longer 
periods. Accordingly, each day, the Fund will position its portfolio so 
that it can seek to track the Index. The direction and extent of the 
Index's movements each day will dictate the direction and extent of the 
Fund's portfolio rebalancing. For example, if the level of the Index 
falls on a given day, net assets of the Fund would fall. As a result, 
exposure to the Index, through futures positions held by the Fund, 
would need to be decreased. The opposite would be the case if the level 
of the Index rises on a given day.
    The time and manner in which the Fund rebalances its portfolio is 
defined by the Index methodology but may vary from the Index 
methodology depending upon market conditions and other circumstances 
including the potential impact of the rebalance on the price of the VIX 
futures contracts. The Sponsor will seek to minimize the market impact 
of Fund rebalances on the price of VIX futures contracts by limiting 
the Fund's participation, on any given day, in VIX futures contracts to 
no more than one-quarter of the contracts traded on CFE during any 
Rebalance Period (defined by the Index methodology as 3:45 p.m.-4 p.m. 
ET). If the Fund's portfolio rebalance exceeds one-quarter of the 
futures' volume between 3:45 p.m. and 4 p.m. ET, the Sponsor will 
extend the rebalance period to include, for example, the period between 
4 p.m. and 4:15 p.m. ET and TAS.
    The Sponsor expects that allowing the Fund to participate in an 
Extended Rebalance Period will minimize the impact on the price of VIX 
futures contracts, and particularly minimize any impact of large Fund 
rebalances during periods of market illiquidity. Accordingly, by 
defining an explicit rebalancing methodology and limiting the Fund's 
participation in the VIX futures contracts should reduce the impact of 
the Fund's rebalancing on the price of VIX futures contracts.
    The Sponsor believes that the Fund would enter an Extended 
Rebalance Period most often during periods of extraordinary volatility 
or illiquidity in VIX futures contracts. For example, in surveying the 
two most volatile months in recent history--February 2018 and March 
2020--and assuming a size equal to the largest previously achieved by 
an inverse VIX ETP ($1.9 billion--Symbol: XIV on February 1, 2018), the 
Fund would have exceeded one-quarter of the trading volume of VIX 
futures contracts during the Rebalance Period for seven days in 
February 2018 and for five days in March 2020. Having the Fund 
participate in an Extended Rebalance Period on those days would have 
resulted in a maximum participation in VIX futures contracts over the 
Extended Rebalance Period of 14.1% in February 2018 and 12.6% in March 
2020.
    The proposed rule change is designed to perfect the mechanism of a 
free and open market and, in general, to protect investors and the 
public interest in that it will facilitate the listing and trading of 
an additional type of exchange-traded product that will enhance 
competition among market participants, to the benefit of investors and 
the marketplace.
    As noted above, the Exchange has in place surveillance procedures 
relating to trading in the Shares and may obtain information via ISG 
from other exchanges that are members of ISG or with which the Exchange 
has entered into a comprehensive surveillance sharing agreement. In 
addition, as noted above, investors will have ready access to 
information regarding the Fund's holdings, the IIV, and quotation and 
last sale information for the Shares. 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 of an 
additional exchange-traded product on the Exchange, which will enhance 
competition among listing venues, to the benefit of issuers, investors, 
and the marketplace more broadly.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange neither solicited nor received 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 will:

[[Page 59843]]

    A. By order approve or disapprove such proposed rule change, or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-CboeBZX-2020-070 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-CboeBZX-2020-070. 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 website (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 website 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. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-CboeBZX-2020-070 and should be submitted 
on or before October 14, 2020.

    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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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-20938 Filed 9-22-20; 8:45 am]
BILLING CODE 8011-01-P