Document ID: SEC-2019-0344-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2019-03-26T04:00Z

[Federal Register Volume 84, Number 58 (Tuesday, March 26, 2019)]
[Notices]
[Pages 11375-11379]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-05704]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85375; File No. SR-NYSEArca-2018-98]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Amendment No. 2 and Order Instituting Proceedings To Determine 
Whether To Approve or Disapprove a Proposed Rule Change, as Modified by 
Amendment No. 2, To List and Trade Shares of the iShares Commodity 
Multi-Strategy ETF Under NYSE Arca Rule 8.600-E

March 20, 2019.

I. Introduction

    On December 21, 2018, NYSE Arca, Inc. (``Exchange'' or ``NYSE 
Arca'') 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 
iShares Commodity Multi-Strategy ETF (``Fund'') under NYSE Arca Rule 
8.600-E. On February 1, 2019, pursuant to Section 19(b)(1) of the 
Act,\3\ the Commission noticed the proposed rule change and, pursuant 
to Section 19(b)(2) of the Act,\4\ designated a longer period within 
which to approve the proposed rule change, disapprove the proposed rule 
change, or institute proceedings to determine whether to approve or 
disapprove the proposed rule change.\5\ On March 6, 2019, the Exchange 
filed Amendment No. 1 to the proposed rule change, which replaced and 
superseded the proposed rule change as originally filed.\6\ On March 
14, 2019, the Exchange filed Amendment No. 2 to the proposed rule 
change, which replaced and superseded the proposed rule change, as 
modified by Amendment No. 1.\7\ The Commission has received no comment 
letters on the proposal. The Commission is publishing this notice and 
order to solicit comments on the proposed rule change, as modified by 
Amendment No. 2, from interested persons and to institute proceedings 
pursuant to Section 19(b)(2)(B) of the Act \8\ to determine whether to 
approve or disapprove the proposed rule change, as modified by 
Amendment No. 2.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(1).
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 85033, 84 FR 2618 
(February 7, 2019). The Commission designated March 21, 2019, as the 
date by which the Commission shall approve the proposed rule change, 
disapprove the proposed rule change, or institute proceedings to 
determine whether to approve or disapprove the proposed rule change.
    \6\ Amendment No. 1 is available at: https://www.sec.gov/comments/sr-nysearca-2018-98/srnysearca201898-5031693-183046.pdf.
    \7\ In Amendment No. 2, the Exchange: (1) Identified the 
Reference Benchmark (as defined below); (2) clarified that the Fund 
is not obligated to invest in any futures contracts included in, and 
does not seek to replicate the performance of, the Reference 
Benchmark; (3) modified the types of derivative instruments and 
reference assets for such derivative instruments that the Fund may 
invest in; (4) clarified that commodity-linked notes are among the 
Fixed Income Instruments (as defined below) that the Fund may invest 
in; (5) specified that the Fund may invest in ETNs and ETFs (each as 
defined below); (6) added a representation that to the extent the 
Trust (as defined below) effects the redemption of Shares in cash, 
such transactions will be effected in the same manner or in an 
equitable manner for all Authorized Participants (as defined below), 
subject to the best interests of the Fund; (7) added a 
representation that the Fund's holdings in OTC Derivatives (as 
defined below) will satisfy the criteria applicable to holdings in 
listed derivatives in Commentary .01(d)(2) to NYSE Arca Rule 8.600-E 
on an initial and continued listing basis; (8) added a 
representation that the Adviser (as defined below) and its 
affiliates actively monitor counterparty credit risk exposure 
(including for OTC derivatives) and evaluate counterparty credit 
quality on a continuous basis; (8) stated that the Reference 
Benchmark price is available via Bloomberg and that the Reference 
Benchmark methodology and constituent list is available via ICE Data 
Services; and (9) made technical and conforming changes. Amendment 
No. 2 is available at: https://www.sec.gov/comments/sr-nysearca-2018-98/srnysearca201898-5123714-183326.pdf.
    \8\ 15 U.S.C. 78s(b)(2)(B).
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II. Summary of the Exchange's Description of the Proposal, as Modified 
by Amendment No. 2 \9\
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    \9\ For a complete description of the Exchange's proposal, see 
Amendment No. 2, supra note 7.
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    The Exchange proposes to list and trade Shares of the Fund under 
NYSE Arca Rule 8.600-E, which governs the listing and trading of 
Managed Fund Shares on the Exchange. The Shares will be offered by 
iShares U.S. ETF Trust (``Trust''), which is registered with the 
Commission as an open-end management investment company.\10\ The Fund 
is a series of the Trust.
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    \10\ According to the Exchange, on December 3, 2018, the Trust 
filed with the Commission its registration statement on Form N-1A 
under the Securities Act of 1933 and under the Investment Company 
Act of 1940 (``1940 Act'') relating to the Fund (File Nos. 333-
179904 and 811-22649) (``Registration Statement''). In addition, the 
Exchange states that the Commission has issued an order upon which 
the Trust may rely, granting certain exemptive relief under the 1940 
Act. See Investment Company Act Release No. 29571 (January 24, 2011) 
(File No. 812-13601).
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    BlackRock Fund Advisors (``Adviser'') will be the investment 
adviser for the Fund.\11\ BlackRock Investments, LLC will be the 
distributor for the Fund's Shares. State Street Bank and Trust Company 
will serve as the administrator, custodian and transfer agent for the 
Fund.
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    \11\ According to the Exchange, the Adviser is not registered as 
a broker-dealer but is affiliated with a broker-dealer, and has 
implemented and will maintain a fire wall with respect to its 
broker-dealer affiliate regarding access to information concerning 
the composition and/or changes to the portfolio. In the event (a) 
the Adviser becomes registered as a broker-dealer or newly 
affiliated with a 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 its broker-dealer affiliate 
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 such portfolio. The Exchange also represents 
that the Adviser and its related personnel are subject to the 
provisions of Rule 204A-1 under the Investment Advisers Act of 1940 
relating to codes of ethics.
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A. Fund Investments

    According to the Exchange, the investment objective of the Fund 
will be to seek to provide exposure, on a total return basis, to a 
group of commodities with characteristics of carry, momentum, and 
value. The Fund is actively managed and seeks to achieve its investment 
objective in part \12\ by, under normal market conditions,\13\ 
investing in listed and over-the-counter (``OTC'') total return swaps 
referencing the ICE BofAML Commodity Multi-Factor Total Return Index 
(``Reference Benchmark'').\14\ In connection with

[[Page 11376]]

investments in swaps on the Reference Benchmark, the Fund is expected 
to establish new swaps contracts on an ongoing basis and replace 
expiring contracts.\15\ Swaps subsequently entered into by the Fund may 
have terms that differ from the swaps the Fund previously held. The 
Fund expects generally to pay a fixed payment rate and certain swap 
related fees to the swap counterparty and receive the total return of 
the Reference Benchmark, including in the event of negative performance 
by the Reference Benchmark, negative return (i.e., a payment from the 
Fund to the swap counterparty). In seeking total return, the Fund 
additionally aims to generate interest income and capital appreciation 
through a cash management strategy consisting primarily of cash, cash 
equivalents,\16\ and fixed income securities other than cash 
equivalents, as described below.
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    \12\ The Fund's investment objective is also achieved by 
investing in cash, cash equivalents, Commodity Investments, Fixed 
Income Securities and Short-Term Fixed Income Securities (each as 
defined or described below).
    \13\ The term ``normal market conditions'' is defined in NYSE 
Arca Rule 8.600-E(c)(5).
    \14\ Although the Fund may hold swaps on the Reference 
Benchmark, or direct investments in, the same futures contracts as 
those included in the Reference Benchmark, the Fund is not obligated 
to invest in any futures contracts included in, and does not seek to 
replicate the performance of, the Reference Benchmark.
    \15\ Swaps on the Reference Benchmark are included in 
``Commodity Investments'' as defined below.
    \16\ Cash equivalents are the short-term instruments enumerated 
in Commentary .01(c) to NYSE Arca Rule 8.600-E.
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    The Fund intends to follow a multifactor strategy reflected by the 
Reference Benchmark, which Reference Benchmark equally weights three 
sub-indices designed to provide exposure to carry, momentum, and value 
factors. The Fund will invest in financial instruments described below 
that provide exposure to commodities and not in the physical 
commodities themselves. The ``carry'' sub-index emphasizes commodities 
and contract months with the greatest degree of backwardation or lowest 
degree of contango.\17\ Second, the ``momentum'' sub-index underweights 
or overweights commodities based on the strength of performance 
patterns over multiple time periods. Third, the ``value'' sub-index 
measures value for each commodity by the ratio of its 3-month average 
spot price to its 5-year average. Sector weights are held constant 
versus a broad non-factor weighted commodity index, but within each 
sector, weights of individual commodities are tilted to favor those 
with the lowest valuation ratio. Within each sub-index, contract months 
are selected to maximize backwardation and minimize contango.
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    \17\ According to the Exchange, in order to maintain exposure to 
a futures contract on a particular commodity, an investor must sell 
the position in the expiring contract and buy a new position in a 
contract with a later delivery month, which is referred to as 
``rolling.'' If the price for the new futures contract is less than 
the price of the expiring contract, then the market for the 
commodity is said to be in ``backwardation.'' In these markets, roll 
returns are positive, which is referred to as ``positive carry.'' 
The term ``contango'' is used to describe a market in which the 
price for a new futures contract is more than the price of the 
expiring contract. In these markets, roll returns are negative, 
which is referred to as ``negative carry.'' The ``carry'' sub-index 
seeks to employ a positive carry strategy that emphasizes 
commodities and futures contract months with the greatest degree of 
backwardation and lowest degree of contango, resulting in net gains 
through positive roll returns.
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    The Fund expects to obtain a substantial amount of its exposure to 
the carry, momentum, and value strategies by entering into total return 
swaps that pay the returns of the commodity futures contracts 
referenced in the Reference Benchmark. The Reference Benchmark includes 
20 futures contracts on physical agricultural, energy, livestock, 
precious metals, and industrial metals listed on U.S. regulated futures 
exchanges.
    The Fund (through its Subsidiary (as defined below)) may hold the 
following listed derivative instruments: Futures, options, and swaps on 
commodities (which commodities are from the same sectors as those 
included in the Reference Benchmark); currencies; U.S. and non-U.S. 
equity securities; fixed income securities (as defined in Commentary 
.01(b) to NYSE Arca Rule 8.600-E, but excluding Short-Term Fixed Income 
Securities (as defined below)); interest rates; and financial rates; or 
a basket or index of any of the foregoing (collectively, ``Listed 
Derivatives'').\18\ Listed Derivatives will comply with the criteria in 
Commentary .01(d) of NYSE Arca Rule 8.600-E.
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    \18\ Examples of Listed Derivatives the Fund may invest in 
include: Exchange traded futures contracts similar to those found in 
the Reference Benchmark, exchange traded futures contracts on the 
Reference Benchmark, swaps on commodity futures contracts similar to 
those found in the Reference Benchmark, and futures and options that 
correlate to the investment returns of commodities without investing 
directly in physical commodities.
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    The Fund (through its Subsidiary (as defined below)) may hold the 
following OTC derivative instruments: Forwards, options, and swaps on 
commodities (which commodities are from the same sectors as those 
included in the Reference Benchmark); currencies; U.S. and non-U.S. 
equity securities; fixed income securities (as defined in Commentary 
.01(b) to NYSE Arca Rule 8.600-E, but excluding Short-Term Fixed Income 
Securities); interest rates; and financial rates; or a basket or index 
of any of the foregoing (collectively, ``OTC Derivatives,'' \19\ and 
together with Listed Derivatives, ``Commodity Investments'').\20\
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    \19\ As discussed below under ``Application of Generic Listing 
Requirements,'' the Fund's and the Subsidiary's holdings in OTC 
Derivatives will not comply with the criteria in Commentary .01(e) 
of NYSE Arca Rule 8.600-E.
    \20\ Examples of OTC Derivatives the Fund may invest in include 
swaps on commodity futures contracts similar to those found in the 
Reference Benchmark and options that correlate to the investment 
returns of commodities without investing directly in physical 
commodities.
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    The Fund may hold cash, cash equivalents, and fixed income 
securities other than cash equivalents, as described further below.
    Specifically, the Fund may invest in Short-Term Fixed Income 
Securities (as defined below) other than cash equivalents on an ongoing 
basis to provide liquidity or for other reasons.\21\ Short-Term Fixed 
Income Securities will have a maturity of no longer than 397 days and 
include only the following: (i) Money market instruments; (ii) 
obligations issued or guaranteed by the U.S. government, its agencies 
or instrumentalities (including government-sponsored enterprises); 
(iii) negotiable certificates of deposit, bankers' acceptances, fixed-
time deposits and other obligations of U.S. and non-U.S. banks 
(including non-U.S. branches) and similar institutions; (iv) commercial 
paper; (v) non-convertible corporate debt securities (e.g., bonds and 
debentures); (vi) repurchase agreements; (vii) short-term U.S. dollar-
denominated obligations of non-U.S. banks (including U.S. branches) 
that, in the opinion of the Adviser, are of comparable quality to 
obligations of U.S. banks that may be purchased by the Fund; and (viii) 
sovereign obligations (collectively, ``Short-Term Fixed Income 
Securities''). Any of these securities may be purchased on a current or 
forward-settled basis.\22\
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    \21\ As discussed under ``Application of Generic Listing 
Requirements'' below, investments in Short-Term Fixed Income 
Securities will not comply with the requirements of Commentary 
.01(b)(1)-(4) to NYSE Arca Rule 8.600-E.
    \22\ To the extent that the Fund and the Subsidiary invest in 
cash and Short-Term Fixed Income Securities that are cash 
equivalents (i.e., that have maturities of less than 3 months) as 
specified in Commentary .01(c) to NYSE Arca Rule 8.600-E, such 
investments will comply with Commentary .01(c) and may be held 
without limitation. Non-convertible corporate debt securities and 
sovereign obligations are not included as cash equivalents in 
Commentary .01(c).
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    The Fund also may invest in fixed income securities as defined in 
Commentary .01(b) to NYSE Arca Rule 8.600-E,\23\ other than cash 
equivalents and Short-Term Fixed Income Securities, with remaining 
maturities longer than 397 days (``Fixed Income

[[Page 11377]]

Securities''). Such Fixed Income Securities will comply with 
requirements of Commentary .01(b) to NYSE Arca Rule 8.600-E.\24\
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    \23\ Commentary .01(b) to NYSE Arca Rule 8.600-E defines fixed 
income securities as debt securities that are notes, bonds, 
debentures or evidence of indebtedness that include, but are not 
limited to, U.S. Department of Treasury securities (``Treasury 
Securities''), government-sponsored entity securities (``GSEs''), 
municipal securities, trust preferred securities, supranational debt 
and debt of a foreign country or a subdivision thereof, investment 
grade and high yield corporate debt, bank loans, mortgage and asset 
backed securities, and commercial paper.
    \24\ Among the Fixed Income Securities in which the Fund may 
invest are commodity-linked notes.
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    The Fund may also hold exchange-traded notes (``ETNs'') \25\ and 
exchange-traded funds (``ETFs'').\26\
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    \25\ ETNs are securities as described in NYSE Arca Rule 5.2-
E(j)(6) (Equity Index-Linked Securities, Commodity-Linked 
Securities, Currency-Linked Securities, Fixed Income Index-Linked 
Securities, Futures-Linked Securities and Multifactor Index-Linked 
Securities).
    \26\ For purposes of the filing, the term ``ETFs'' includes 
Investment Company Units (as described in NYSE Arca Rule 5.2-
E(j)(3)); Portfolio Depositary Receipts (as described in NYSE Arca 
Rule 8.100-E); and Managed Fund Shares (as described in NYSE Arca 
Rule 8.600-E). All ETFs will be listed and traded in the U.S. on a 
national securities exchange. The Fund will not invest in inverse or 
leveraged (e.g., 2X, -2X, 3X or -3X) ETFs.
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    The Fund's exposure to Commodity Investments is obtained by 
investing through a wholly-owned subsidiary organized in the Cayman 
Islands (``Subsidiary'').\27\ The Fund controls the Subsidiary, and the 
Subsidiary is advised by the Adviser and has the same investment 
objective as the Fund. In compliance with the requirements of Sub-
Chapter M of the Internal Revenue Code of 1986, the Fund may invest up 
to 25% of its total assets in the Subsidiary. The Subsidiary is not an 
investment company registered under the 1940 Act and is a company 
organized under the laws of the Cayman Islands. The Trust's Board of 
Trustees (``Board'') has oversight responsibility for the investment 
activities of the Fund, including its investment in the Subsidiary, and 
the Fund's role as sole shareholder of the Subsidiary.
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    \27\ The Exchange represents that all statements related to the 
Fund's investments and restrictions are applicable to the Fund and 
Subsidiary collectively.
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    The Fund's Commodity Investments held in the Subsidiary are 
intended to provide the Fund with exposure to broad commodities. The 
Subsidiary may hold cash and cash equivalents.

B. Investment Restrictions

    The Fund and the Subsidiary will not invest in securities or other 
financial instruments that have not been described in the proposed rule 
change. The Fund's investments, including derivatives, will be 
consistent with the Fund's investment objective and will not be used to 
enhance leverage (although certain derivatives and other investments 
may result in leverage). That is, the Fund's investments will not be 
used to seek performance that is the multiple or inverse multiple 
(e.g., 2X or -3X) of the Fund's Reference Benchmark.

C. Use of Derivatives by the Fund

    Investments in derivative instruments will be made in accordance 
with the Fund's investment objective and policies. To limit the 
potential risk associated with such transactions, the Fund will enter 
into offsetting transactions or segregate or ``earmark'' assets 
determined to be liquid by the Adviser in accordance with procedures 
established by the Board. In addition, the Fund has included 
appropriate risk disclosure in its offering documents, including 
leveraging risk. Leveraging risk is the risk that certain transactions 
of the Fund, including the Fund's use of derivatives, may give rise to 
leverage, causing the Fund to be more volatile than if it had not been 
leveraged.
    The Adviser believes there will be minimal, if any, impact to the 
arbitrage mechanism as a result of the Fund's use of derivatives. The 
Adviser understands that market makers and participants should be able 
to value derivatives as long as the positions are disclosed with 
relevant information. The Adviser believes that the price at which 
Shares of the Fund trade will continue to be disciplined by arbitrage 
opportunities created by the ability to purchase or redeem Shares of 
the Fund at their net asset value (``NAV''), which should ensure that 
Shares of the Fund will not trade at a material discount or premium in 
relation to their NAV.
    The Adviser does not believe there will be any significant impacts 
to the settlement or operational aspects of the Fund's arbitrage 
mechanism due to the use of derivatives.

D. Application of Generic Listing Requirements

    The Exchange represents that the portfolio for the Fund will not 
meet all of the ``generic'' listing requirements of Commentary .01 to 
NYSE Arca Rule 8.600-E applicable to the listing of Managed Fund 
Shares. The Exchange represents that, other than Commentary .01(b)(1)-
(4) (with respect to Short-Term Fixed Income Securities) and .01(e) 
(with respect to OTC Derivatives) to NYSE Arca Rule 8.600-E, as 
described below, the Fund's portfolio will meet all other requirements 
of NYSE Arca Rule 8.600-E.
    According to the Exchange, the Fund's investments in Short-Term 
Fixed Income Securities will not comply with the requirements set forth 
in Commentary .01(b)(1)-(4) to NYSE Arca Rule 8.600-E.\28\ The Exchange 
states that while the requirements set forth in Commentary .01(b)(1)-
(4) include rules intended to ensure that the fixed income securities 
included in a fund's portfolio are sufficiently large and diverse, and 
have sufficient publicly available information regarding the issuances, 
the Exchange believes that any concerns, regarding non-compliance are 
mitigated by the types of instruments that the Fund would hold. The 
Exchange represents that the Fund's Short-Term Fixed Income Securities 
primarily would include those instruments that are included in the 
definition of cash and cash equivalents,\29\ but are not considered 
cash and cash equivalents because they have maturities of three months 
or longer. The Exchange believes, however, that, because all Short-Term 
Fixed Income Securities, including non-convertible corporate debt 
securities and sovereign obligations (which are not cash equivalents as 
enumerated in Commentary .01(c) to NYSE Arca Rule 8.600-E), are highly 
liquid they are less susceptible than other types of fixed income 
instruments both to price manipulation and volatility and that the 
holdings as proposed are generally consistent with the policy concerns 
which Commentary .01(b)(1)-(4) is intended to address. Because the 
Short-Term Fixed Income Securities will consist of high-quality fixed 
income securities described above, the Exchange believes that the 
policy concerns that Commentary .01(b)(1)-(4)

[[Page 11378]]

is intended to address are otherwise mitigated and that the Fund should 
be permitted to hold these securities in a manner that may not comply 
with Commentary .01(b)(1)-(4).
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    \28\ Commentary .01(b)(1)-(4) to NYSE Arca Rule 8.600-E requires 
that the components of the fixed income portion of a portfolio meet 
the following criteria initially and on a continuing basis: (1) 
Components that in the aggregate account for at least 75% of the 
fixed income weight of the portfolio each shall have a minimum 
original principal amount outstanding of $100 million or more; (2) 
no component fixed-income security (excluding Treasury Securities 
and GSE Securities) shall represent more than 30% of the fixed 
income weight of the portfolio, and the five most heavily weighted 
component fixed income securities in the portfolio (excluding 
Treasury Securities and GSE Securities) shall not in the aggregate 
account for more than 65% of the fixed income weight of the 
portfolio; (3) an underlying portfolio (excluding exempted 
securities) that includes fixed income securities shall include a 
minimum of 13 non-affiliated issuers, provided, however, that there 
shall be no minimum number of non-affiliated issuers required for 
fixed income securities if at least 70% of the weight of the 
portfolio consists of equity securities as described in Commentary 
.01(a); and (4) component securities that in aggregate account for 
at least 90% of the fixed income weight of the portfolio must be 
either (a) from issuers that are required to file reports pursuant 
to Sections 13 and 15(d) of the Securities Exchange Act of 1934; (b) 
from issuers that have a worldwide market value of its outstanding 
common equity held by non-affiliates of $700 million or more; (c) 
from issuers that have outstanding securities that are notes, bonds 
debentures, or evidence of indebtedness having a total remaining 
principal amount of at least $1 billion; (d) exempted securities as 
defined in Section 3(a)(12) of the Securities Exchange Act of 1934; 
or (e) from issuers that are a government of a foreign country or a 
political subdivision of a foreign country.
    \29\ See supra note 16.
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    The Exchange represents that the Fund's portfolio with respect to 
OTC Derivatives will not comply with the requirements set forth in 
Commentary .01(e) to NYSE Arca Rule 8.600-E.\30\ Specifically, the 
Exchange states that up to 60% of the Fund's assets (calculated as the 
aggregate gross notional value) may be invested in OTC Derivatives. The 
Exchange states that the Adviser believes that it is important to 
provide the Fund with additional flexibility to manage risk associated 
with its investments and, depending on market conditions, it may be 
critical that the Fund be able to utilize available OTC Derivatives to 
efficiently gain exposure to the multiple commodities that underlie the 
Reference Benchmark, as well as commodity futures contracts similar to 
those found in the Reference Benchmark. The Exchange states that OTC 
Derivatives can be tailored to provide specific exposure to the Fund's 
Reference Benchmark, as well as commodity futures contracts similar to 
those found in the Reference Benchmark, allowing the Fund to more 
efficiently meet its investment objective.\31\ The Exchange further 
states that if the Fund were to gain commodity exposure exclusively 
through the use of listed futures, the Fund's holdings in Listed 
Derivatives would be subject to position limits and accountability 
levels established by an exchange, and such limitations would restrict 
the Fund's ability to gain efficient exposure to the commodities in the 
Reference Benchmark, or futures contracts similar to those found in the 
Reference Benchmark, thereby impeding the Fund's ability to satisfy its 
investment objective.
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    \30\ Commentary .01(e) to NYSE Arca Rule 8.600-E provides that, 
on an initial and continuing basis, no more than 20% of the assets 
in the portfolio may be invested in OTC derivatives (calculated as 
the aggregate gross notional value of the OTC derivatives).
    \31\ As an example, the Exchange states that the Reference 
Benchmark is composed of 20 futures contracts across 20 physical 
commodities, which may not be sufficiently liquid and would not 
provide the commodity exposure the Fund requires to meet its 
investment objective if the Fund were to invest in the futures 
directly. The Exchange states that a total return swap can be 
structured to provide exposure to the same futures contracts as 
exist in the Reference Benchmark, as well as commodity futures 
contracts similar to those found in the Reference Benchmark, while 
providing sufficient efficiency to allow the Fund to more easily 
meet its investment objective.
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    The Exchange states that the Adviser represents that the Fund's 
holdings in OTC Derivatives will satisfy the criteria applicable to 
holdings in Listed Derivatives in Commentary .01(d)(2) to NYSE Arca 
Rule 8.600-E on an initial and continued listing basis.\32\ Thus, with 
respect to the Fund's holdings in OTC Derivatives, the aggregate gross 
notional value of OTC Derivatives based on any five or fewer underlying 
reference assets will not exceed 65% of the weight of the portfolio 
(including gross notional exposures), and the aggregate gross notional 
value of OTC Derivatives based on any single underlying reference asset 
will not exceed 30% of the weight of the portfolio (including gross 
notional exposures). The Exchange also represents that the Adviser and 
its affiliates actively monitor counterparty credit risk exposure 
(including for OTC derivatives) and evaluate counterparty credit 
quality on a continuous basis. Finally, the Exchange states that the 
Adviser represents that futures contracts on all commodities in the 
Reference Benchmark are traded on futures exchanges that are members of 
the Intermarket Surveillance Group.
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    \32\ Commentary .01(d)(2) to NYSE Arca Rule 8.600-E provides 
that, with respect to a fund's portfolio, 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).
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III. Proceedings To Determine Whether To Approve or Disapprove SR-
NYSEArca-2018-98, as Modified by Amendment No. 2, and Grounds for 
Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \33\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of such 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the proposed rule change. Institution of proceedings 
does not indicate that the Commission has reached any conclusions with 
respect to any of the issues involved. Rather, as described below, the 
Commission seeks and encourages interested persons to provide comments 
on the proposed rule change.
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    \33\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\34\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposed rule change's consistency with Section 6(b)(5) 
of the Act, which requires, among other things, that the rules of a 
national securities exchange be ``designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade,'' and ``to protect investors and the public 
interest.'' \35\
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    \34\ Id.
    \35\ 15 U.S.C. 78f(b)(5).
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IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposed rule 
change, as modified by Amendment No. 2, is consistent with Section 
6(b)(5) or any other provision of the Act, or the rules and regulations 
thereunder. Although there do not appear to be any issues relevant to 
approval or disapproval that would be facilitated by an oral 
presentation of views, data, and arguments, the Commission will 
consider, pursuant to Rule 19b-4 under the Act,\36\ any request for an 
opportunity to make an oral presentation.\37\
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    \36\ 17 CFR 240.19b-4.
    \37\ Section 19(b)(2) of the Act, as amended by the Securities 
Acts Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Acts Amendments of 1975, Senate Comm. 
on Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposed rule change, as modified by 
Amendment No. 2, should be approved or disapproved by April 16, 2019. 
Any person who wishes to file a rebuttal to any other person's 
submission must file that rebuttal by April 30, 2019. The Commission 
asks that commenters address the sufficiency of the Exchange's 
statements in support of the proposal, which are set forth in Amendment 
No. 2,\38\ in addition to any other comments they may wish to submit 
about the proposed rule change.
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    \38\ See supra note 7.
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    In this regard, the Commission seeks comment on the Exchange's 
statements that the Fund will not comply with the requirement in 
Commentary .01(e) to NYSE Arca Rule 8.600-E that

[[Page 11379]]

investments in OTC Derivatives be limited to 20% of the assets of the 
Fund's portfolio. Instead, the Fund's investments in OTC Derivatives 
would be limited to 60% of the Fund's assets. Such OTC Derivatives may 
be forwards, options, and swaps on commodities (which commodities are 
from the same sectors as those included in the Reference Benchmark); 
currencies; U.S. and non-U.S. equity securities; fixed income 
securities (as defined in Commentary .01(b) to NYSE Arca Rule 8.600-E, 
but excluding Short-Term Fixed Income Securities); interest rates; and 
financial rates; or a basket or index of any of the foregoing. The 
Commission specifically seeks comment on whether the Fund's proposed 
investments in OTC Derivatives are consistent with the requirement that 
the rules of a national securities exchange be ``designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade,'' and ``to protect investors and the 
public interest.'' \39\ Has the Exchange has provided sufficient 
information relating to OTC Derivatives, including the underlying 
reference assets of such OTC Derivatives, for the Commission to 
determine that trading of the Fund's Shares would be consistent with 
the Act?
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    \39\ 15 U.S.C. 78f(b)(5).
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    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-NYSEArca-2018-98 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-NYSEArca-2018-98. 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-NYSEArca-2018-98 and should be submitted 
by April 16, 2019. Rebuttal comments should be submitted by April 30, 
2019.
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    \40\ 17 CFR 200.30-3(a)(12); 17 CFR 200.30-3(a)(57).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\40\
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-05704 Filed 3-25-19; 8:45 am]
 BILLING CODE 8011-01-P