Document ID: SEC-2021-0346-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe BZX Exchange, Inc.
Posted Date: 2021-03-11T05:00Z

[Federal Register Volume 86, Number 46 (Thursday, March 11, 2021)]
[Notices]
[Pages 13939-13944]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-05027]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91264; File No. SR-CboeBZX-2020-070]

Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of 
Filing of Amendment Nos. 1 and 3 and Order Granting Accelerated 
Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1 and 
3, To List and Trade Shares of the -1x Short VIX Futures ETF Under BZX 
Rule 14.11(f)(4) (Trust Issued Receipts)

March 5, 2021.

I. Introduction

    On September 4, 2020, Cboe BZX Exchange, Inc. (``Exchange'' or 
``BZX'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to list and trade shares (``Shares'') of the -1x 
Short VIX Futures ETF (``Fund''), a series of VS Trust (``Trust''), 
under BZX Rule 14.11(f)(4) (Trust Issued Receipts). The proposed rule 
change was published for comment in the Federal Register on September 
23, 2020.\3\ On October 30, 2020, pursuant to Section 19(b)(2) of the 
Act,\4\ the Commission designated a longer period within which to 
approve the proposed rule change, disapprove the proposed rule change, 
or institute proceedings to determine whether to disapprove the 
proposed rule change.\5\ On December 14, 2020, the Commission 
instituted proceedings pursuant to Section 19(b)(2)(B) of the Act \6\ 
to determine whether to approve or disapprove the proposed rule 
change.\7\ On January 28, 2021, the Exchange filed Amendment No. 1 to 
the proposed rule change, which replaced and superseded the proposed 
rule change as originally filed.\8\ On February 19, 2021, the

[[Page 13940]]

Exchange filed partial Amendment No. 3 to the proposed rule change.\9\ 
The Commission is publishing this notice to solicit comments on 
Amendment No. 1 from interested persons, and is approving the proposed 
rule change, as modified by Amendment Nos. 1 and 3, on an accelerated 
basis.
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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. 89901 (Sept. 17, 
2020), 85 FR 59836 (``Notice''). Comments on the proposed rule 
change can be found at: https://www.sec.gov/comments/sr-cboebzx-2020-070/srcboebzx2020070.htm.
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 90292, 85 FR 70678 
(Nov. 5, 2020). The Commission designated December 22, 2020, as the 
date by which the Commission shall approve or disapprove, or 
institute proceedings to determine whether to disapprove, the 
proposed rule change.
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ See Securities Exchange Act Release No. 90659, 85 FR 82536 
(December 18, 2020) (``OIP'').
    \8\ In Amendment No. 1, the Exchange: (i) Updated the 
information regarding the Fund's registration statement; (ii) 
clarified that the Index (defined below) seeks to reflect the 
returns that are potentially available from holding an unleveraged 
short position in first- and second-month VIX Futures Contracts 
(defined below) by measuring its daily performance from the weighted 
average price of VIX Futures Contracts; (iii) stated that the 
Sponsor (defined below) will seek to minimize the market impact of 
rebalances across all exchange traded products based on VIX Futures 
Contracts (``VIX ETPs'') that it sponsors (``Funds'') on the price 
of VIX Futures Contracts by limiting such Funds' participation, on 
any given day, in VIX Futures Contracts to no more than ten percent 
(10%) of the contracts traded on Cboe Futures Exchange during any 
Rebalance Period (defined below); (iv) stated that, in the event the 
Funds expect to hit this 10% threshold during the primary Rebalance 
Period from 3:45 p.m. to 4:00 p.m. E.T., the Funds would extend 
their respective rebalances into additional Rebalance Periods and 
the Trade At Settlement (``TAS'') market; (v) stated that, to limit 
participation during periods of market illiquidity, the Sponsor may 
vary the manner and period over which all funds it sponsors are 
rebalanced, including the Fund, and that Funds will be allocated 
executions based on their percentage of notional transaction volume 
required; (vi) stated that the Index's use of a weighted average 
price reference and the Sponsor's commitment to cap participation in 
the VIX futures market during any Rebalance Period to no more than 
10% for all Funds should, among other things, help reduce the market 
impact of all exposure to the VIX futures market; (vii) stated that, 
in reviewing VIX Futures Contracts trading back to March 26, 2004, 
the Fund expects that it would have participated in an Extended 
Rebalance Period (defined below) on one or more days only in 
February 2018 and March 2020; and (viii) made technical, clarifying, 
and conforming changes. Amendment No. 1 is available at: https://www.sec.gov/comments/sr-cboebzx-2020-070/srcboebzx2020070-8308776-228419.pdf.
    \9\ On February 16, 2021, the Exchange submitted Amendment No. 2 
to the proposed rule change, and on February 19, 2021, the Exchange 
withdrew Amendment No. 2 to the proposed rule change. In Amendment 
No. 3, the Exchange added a representation that the Fund will notify 
both the Exchange and the Commission in the event that the Fund 
participates in an Extended Rebalance Period as soon as practicable, 
but no later than 9:00 a.m. E.T. on the trading day following the 
event. Amendment No. 3 is available at: https://www.sec.gov/comments/sr-cboebzx-2020-070/srcboebzx2020070-8393728-229403.pdf.
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II. Description of the Proposed Rule Change, as Modified by Amendment 
Nos. 1 and 3 10
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    \10\ Additional information regarding the Fund, the Trust, and 
the Shares, including investment strategies, creation and redemption 
procedures, and portfolio holdings can be found in Amendment No. 1, 
supra note 8.
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    The Exchange proposes to list and trade Shares of the Fund \11\ 
under BZX Rule 14.11(f)(4), which governs the listing and trading of 
Trust Issued Receipts \12\ on the Exchange. Volatility Shares LLC 
(``Sponsor''), a Delaware limited liability company and a commodity 
pool operator, serves as the Sponsor of the Trust.\13\ Tidal ETF 
Services LLC serves as the administrator; U.S. Bank National 
Association serves as custodian of the Fund and the Shares; U.S. 
Bancorp Fund Services, LLC serves as the sub-administrator and transfer 
agent; and Wilmington Trust Company is the sole trustee of the Trust.
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    \11\ The Fund has filed a registration statement on Form S-1 
under the Securities Act of 1933, dated August 26, 2020 (File No. 
333-248430) (``Registration Statement''). The Registration Statement 
for the Fund is not yet effective, and the Fund will not trade on 
the Exchange until such time that the Registration Statement is 
effective.
    \12\ Rule 14.11(f)(4) applies to Trust Issued Receipts that 
invest in ``Financial Instruments,'' defined in Rule 
14.11(f)(4)(A)(iv) as any combination of investments, including 
cash; securities; options on securities and indices; futures 
contracts; options on futures contracts; forward contracts; equity 
caps, collars and floors; and swap agreements.
    \13\ 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 of and/or changes to the portfolio, and will be subject 
to procedures designed to prevent the use and dissemination of 
material non-public information regarding the portfolio.
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    The Fund seeks to provide daily investment results (before fees and 
expenses) that correspond to the performance of the Short VIX Futures 
Index (SHORTVOL) (``Index'').\14\ The Index measures the daily inverse 
performance of a theoretical portfolio of first- and second-month 
futures contracts on the Cboe Volatility Index (``VIX'').\15\ The Index 
is comprised of VIX futures contracts (``VIX Futures Contracts'').\16\ 
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, resulting in a 
constant weighted average maturity of approximately one month.\17\ 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 by measuring its daily performance from the weighted 
average price of VIX Futures Contracts.\18\
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    \14\ The Index is sponsored by Cboe Global Indexes (``Index 
sponsor''). The Index sponsor is not a registered broker-dealer, but 
is affiliated with a broker-dealer and has implemented and will 
maintain a fire wall with respect to the broker-dealer affiliate 
regarding access to information concerning the composition of 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.
    \15\ The Exchange states that 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.
    \16\ The Exchange states that 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. 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).
    \17\ The Exchange states that the roll period usually begins on 
the Wednesday falling 30 calendar days before the S&P 500 option 
expiration for the following month (``Cboe VIX Monthly Futures 
Settlement Date'') and runs to the Tuesday prior to the subsequent 
month's Cboe VIX Monthly Futures Settlement Date.
    \18\ The Exchange states that 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 over all periods of time. Further, unlike the Index, the VIX, 
which is not a benchmark for the Fund, is calculated based on the 
prices of certain put and call options on the S&P 500. According to 
the Exchange, while the Index does not correspond to the inverse of 
the VIX, because 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.
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    To pursue its investment objective, the Fund will primarily invest 
in VIX Futures Contracts based on components of the Index. The Fund 
will primarily acquire 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.\19\ However, in the event that the Fund is unable to meet its 
investment objective solely through investment in VIX Futures 
Contracts, it may invest in over-the-counter (``OTC'') swaps 
referencing the Index or referencing particular VIX Futures Contracts 
comprising the Index (``VIX Swap Agreements'') \20\ or in listed VIX 
options contracts (``VIX Options Contracts,'' and, together with VIX 
Futures Contracts and VIX Swap Agreements, ``VIX Derivative 
Products''). The Fund may also invest in Cash or Cash Equivalents \21\ 
that may serve as collateral to the Fund's

[[Page 13941]]

investments in VIX Derivative Products.\22\
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    \19\ The Exchange states the Fund's NAV will be calculated at 
4:00 p.m. E.T.
    \20\ The Exchange states the VIX Swap Agreements in which the 
Fund may invest may or may not be cleared. The Exchange states that 
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 collateral as required 
by the counterparty. The Exchange further states that the Fund will 
seek, where possible, to use counterparties, as applicable, whose 
financial status is such that the risk of default is reduced and 
that the Sponsor will evaluate the creditworthiness of 
counterparties on a regular basis. The Exchange states that, 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. According to the Exchange, the Fund may use various 
techniques to minimize OTC counterparty credit risk including 
entering into arrangements with counterparties whereby both sides 
exchange collateral on a mark-to-market basis. The Exchange states 
that 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.
    \21\ For purposes of the proposal, ``Cash and Cash Equivalents'' 
are short-term instruments with maturities of less than 3 months, 
including the following: (i) U.S. Government securities, including 
bills, notes, and bonds differing as to maturity and rates of 
interest, which are either issued or guaranteed by the U.S. Treasury 
or by U.S. Government agencies or instrumentalities; (ii) 
certificates of deposit issued against funds deposited in a bank or 
savings and loan association; (iii) bankers' acceptances, which are 
short-term credit instruments used to finance commercial 
transactions; (iv) repurchase agreements and reverse repurchase 
agreements; (v) bank time deposits, which are monies kept on deposit 
with banks or savings and loan associations for a stated period of 
time at a fixed rate of interest; (vi) commercial paper, which are 
short-term unsecured promissory notes; and (vii) money market funds.
    \22\ According to the Exchange, the Fund will collateralize its 
obligations with Cash and Cash Equivalents consistent with the 
Investment Company Act of 1940 and interpretations thereunder.
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    The Fund will seek to remain fully invested in VIX Derivative 
Products (and Cash and Cash Equivalents as collateral) that provide 
exposure to the Index consistent with its investment objective without 
regard to market conditions, trends or direction. 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.\23\ 
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.
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    \23\ The Exchange states that 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 would 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.
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    The time and manner in which the Fund will rebalance 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 rebalances across all Funds \24\ on the price of VIX Futures 
Contracts by limiting the Funds' participation, on any given day, in 
VIX Futures Contracts to no more than ten percent (10%) of the VIX 
Futures Contracts traded on Cboe Futures Exchange, Inc. (``CFE'') 
during any ``Rebalance Period,'' defined as any fifteen minute period 
of continuous market trading.\25\ To limit participation during periods 
of market illiquidity, the Sponsor, on any given day, may vary the 
manner and period over which all funds it sponsors are rebalanced, and 
as such, the manner and period over which the Fund is rebalanced. The 
Sponsor believes that the Fund will enter an Extended Rebalance Period 
most often during periods of extraordinary market conditions or 
illiquidity in VIX Futures Contracts. In the event that the Fund 
participates in an Extended Rebalance Period, the Fund represents that 
it will notify the Exchange and the Commission of such participation as 
soon as practicable, but no later than 9:00 a.m. E.T. on the trading 
day following the event.
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    \24\ For purposes of the filing, the Exchange states that the 
Funds include the Fund and the 2x Long VIX Futures ETF as proposed 
in SR-CboeBZX-2020-053, but may in the future include additional VIX 
ETPs sponsored by the Sponsor or its affiliates. See Securities 
Exchange Act Release No. 89234 (July 6, 2020), 85 FR 41644 (July 10, 
2020).
    \25\ In the event that the Funds expect to hit the ten percent 
threshold during the primary Rebalance Period from 3:45 p.m. to 4:00 
p.m. E.T., the Funds will extend their respective rebalances into 
additional Rebalance Periods and the TAS market. It is expected that 
this extension will provide the Funds with the flexibility to: Begin 
rebalancing in an earlier period, end rebalancing in a later period, 
and execute contracts in TAS (each an ``Extended Rebalance Period'' 
and collectively the ``Extended Rebalance Period'') while remaining 
below the ten percent cap during any fifteen minute period of 
continuous market trading. The Funds will be allocated executions 
based on their percentage of notional transaction volume required.
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III. Discussion and Commission Findings

    After careful review of the proposed rule change, as modified by 
Amendment Nos. 1 and 3, as well as comments received, the Commission 
finds that the proposed rule change, as modified by Amendment Nos. 1 
and 3, is consistent with the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\26\ In 
particular, the Commission finds that the proposed rule change, as 
modified by Amendment Nos. 1 and 3, is consistent with Section 6(b)(5) 
of the Act,\27\ 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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    \26\ 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).
    \27\ 15 U.S.C. 78f(b)(5).
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A. Market Impact Considerations

    In the OIP, the Commission sought additional comment to assess 
whether the proposal is consistent with the requirements in Section 
6(b)(5) of the Act, and, specifically requested comment on the Fund's 
operation during periods with large percentage increases in volatility 
and whether the Sponsor's proposed limitation on the use of VIX Futures 
Contracts during its rebalance would sufficiently minimize the market 
impact of the Fund's daily rebalance.\28\ As discussed below, the 
Commission finds that the Exchange's proposal regarding the rebalancing 
methodology of the Fund, as amended, is designed to protect investors 
and the public interest.
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    \28\ See OIP, supra note 7, 85 FR 82536 at 82538. As originally 
proposed, the Sponsor would have sought 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 the 
CFE during any rebalance period (defined by the Index methodology as 
3:45 p.m. to 4:00 p.m. E.T.). See Notice, supra note 3, 85 FR 59836 
at 59839.
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    An exchange-traded product (``ETP'') like the Fund would need to 
rebalance its holdings daily. For an ETP that tracks a benchmark index, 
like the Fund, the greater the movement in the reference index, the 
more demand would be associated with its daily rebalance. Because of 
the potential for large, sudden moves in VIX levels, there is a 
potential for large spikes in rebalancing demand for VIX ETPs. 
Following the OIP, the Exchange amended its proposal to state that the 
Sponsor will seek to minimize the market impact of rebalances across 
all Funds on the price of VIX Futures Contracts by limiting the Funds' 
participation, on any given day, in VIX Futures Contracts to no more 
than ten percent of the VIX Futures Contracts traded on CFE during any 
Rebalance Period.\29\
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    \29\ See Amendment No. 1, supra note 8, at 11.
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    In support of its amended proposal, the Exchange states that the 
Sponsor's proposed methodology for the Funds seeks to reduce the 
dependence of VIX ETPs on TAS by seeking to execute part of the Funds' 
daily rebalance outside of TAS and believes that this approach will 
spread VIX futures trading activity over a longer period of time each 
day and should help to reduce market impact during periods of market 
turmoil or disruption.\30\ In addition, the Exchange states that the 
Sponsor expects that allowing the Funds to participate in an Extended 
Rebalance Period will minimize the impact of the Funds' rebalance on 
the price of VIX Futures Contracts, and particularly minimize any 
impact of large rebalances during periods of market illiquidity.\31\ 
The Exchange states that defining an explicit rebalancing methodology 
and limiting the Funds' participation in the VIX Futures Contracts 
should reduce the impact of the Fund's rebalancing on the price of VIX 
Futures Contracts. The Exchange further represents that in the event 
that the Fund participates in an

[[Page 13942]]

Extended Rebalance Period, the Fund will notify the Exchange and the 
Commission of such participation as soon as practicable, but no later 
than 9:00 a.m. E.T. on the trading day following the event.\32\
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    \30\ See Amendment No. 1, supra note 8, at 12-13.
    \31\ See Amendment No. 1, supra note 8, at 13.
    \32\ See Amendment No. 3, supra note 9.
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    In addition, the Exchange states that the Index's use of a weighted 
average price of VIX Futures Contracts to measure its daily 
performance, as described above, is expected to shift part of the 
present dependence of VIX ETPs on the TAS market, and reduce the 
potential impact of very short-term mispricing or manipulation on the 
daily price of the Funds.\33\ The Exchange states that the weighted 
average price reference will also offer the Sponsor a larger window of 
time to rebalance the Fund, and the option to expand the Rebalance 
Period to limit market impact.\34\
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    \33\ See Amendment No. 1, supra note 8, at 12.
    \34\ See id.
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    The Commission received several comment letters in response to the 
OIP, including one from the Sponsor, all of which were supportive of 
the proposal.\35\ Commenters wrote favorably of the rebalancing design 
of the Fund.\36\ One commenter stated that, ``although rebalancing 
flows from leveraged and inverse VIX products are usually absorbed in 
an orderly fashion . . . [there is] a potential benefit from 
distributing rebalancing flows more evenly across the trading day 
instead concentrating the flows around the time of the daily 
settlement.'' \37\ One commenter stated, with respect to the 
rebalancing, that the ``design of this ETF . . . will help insure the 
orderly rebalancing of this product, enhancing price discovery and 
liquidity of the VIX futures markets.'' \38\ Another commenter 
discussed the rebalance feature and capping trading volume during the 
rebalance period and stated that the architecture of the Fund 
substantially reduces the potential for fraudulent and manipulative 
acts and practices because it dilutes key information that encourages 
front running, liquidity withholding and other manipulative 
strategies.\39\ Finally, a commenter affiliated with the Sponsor stated 
that ``altering the valuation period, and hence the target period over 
which the Fund rebalances its portfolio . . . will help reduce the 
dependency of VIX ETPs on the VIX settlement market'' and this 
``dependence by previous and existing VIX ETPs . . .may have triggered 
a major market disruption on February 5, 2018.'' \40\
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    \35\ See letters from Jay Soloff, Lead Options Analyst, 
Investors Alley, dated December 30, 2020 (``Soloff Letter''); Soeren 
Bundgaard Broegger, Copenhagen Business School, dated January 1, 
2021 (``Broegger Letter''); Vance Harwood, President, Six Figure 
Investing, Advisory Board, Invest in Vol, dated January 4, 2021 
(``Harwood Letter''); Stuart Barton, Head of Investments, Sponsor, 
dated January 6, 2021 (``Sponsor Letter''); Invest in Vol, dated 
January 6, 2021 (``Invest in Vol Letter''); Jim Carroll, dated 
January 7, 2021 (``Caroll Letter''); Peter Corrigan, dated January 
7, 2021 (``Corrigan Letter''), and Russell Rhoads, Head of Research 
and Consulting, EQDerivatives, dated January 14, 2021 (``Rhoads 
Letter''). Several of these commenters stated that the Fund would 
fulfill a need in the ETP space by permitting certain investors to 
obtain short volatility exposure in a more efficient manner than is 
currently available. See Sponsor Letter, at 2; Carroll Letter; 
Corrigan Letter; Harwood Letter, at 2; Invest in Vol Letter; Rhoads 
Letter; and Soloff Letter.
    \36\ See Sponsor Letter, at 1-2; Broegger Letter; Corrigan 
Letter; and Harwood Letter, at 1.
    \37\ See Broegger Letter.
    \38\ See Carroll Letter.
    \39\ See Harwood Letter, at 1.
    \40\ See Sponsor Letter.
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    The Commission believes that the Exchange's proposal regarding the 
rebalancing methodology of the Fund, as amended, is reasonably designed 
to help mitigate the potential market impact of the Fund's daily 
rebalance demand during periods when there are large percentage 
increases in volatility.\41\ The Fund's proposed rebalancing process, 
including the Sponsor's commitment to cap participation in the VIX 
Futures Contracts market during any Rebalance Period to no more than 
10% for all Funds, should help to temper the impact of the Funds' 
rebalances on the price of VIX Futures Contracts, particularly during 
periods of market volatility or illiquidity. The Commission believes 
the 10% participation cap strikes an appropriate balance between 
allowing the Funds to rebalance within a reasonably short period of 
time and managing the potential market impact of a large rebalance. 
Therefore, the Commission believes the Exchange's proposal is 
adequately designed to address the market impact concern articulated in 
the OIP. The Commission finds that the proposal is consistent with 
Section 6(b)(5) of the Act, including the protection of investors and 
the public interest.
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    \41\ The Commission's findings in this order are based on the 
specific proposed rule change filed with the Commission, including 
how the proposed rule operates under the current market conditions 
discussed in this order. The Commission recognizes that, over time, 
market conditions in VIX ETP markets, and the related VIX futures 
market, may change.
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B. Other Considerations

    The Commission believes that the proposal is reasonably designed to 
promote fair disclosure of information that may be necessary to price 
the Shares appropriately and to prevent trading in the Shares when a 
reasonable degree of certain pricing transparency cannot be assured 
and, as such, finds that the proposal is designed to prevent fraudulent 
and manipulative acts and practices and protect investors and the 
public interest. Specifically, the Exchange will obtain a 
representation from the Sponsor 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. On each Business 
Day,\42\ before commencement of trading in Shares during Regular 
Trading Hours,\43\ 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. 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 will be provided portfolio composition 
information at the same time, and the same portfolio information will 
be provided on the public website as in electronic files provided to 
authorized participants. Quotation and last-sale information regarding 
the Shares will be disseminated through the facilities of the 
Consolidated Tape Association. As required by BZX Rule 14.11(f)(4), an 
updated Intraday Indicative Value (``IIV'') will be calculated and 
widely disseminated by one or more major market data vendors every 15 
seconds throughout Regular Trading Hours. The IIV will be published on 
the Exchange's website and will be available through on-line 
information services such as Bloomberg and Reuters. Information 
regarding market price and trading volume of the Shares will be 
continually available on a real-time basis throughout the day on 
brokers' computer screens and other electronic services. The Fund's 
website will include a form of the prospectus for the Fund and 
additional data relating to NAV and other applicable quantitative 
information. In addition, the level of the Index will be published at 
least every 15 seconds in real time from 9:30 a.m. to 4:00 p.m. E.T. 
and at the close of trading on each Business Day by Bloomberg and 
Reuters.
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    \42\ 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.
    \43\ As defined in BZX Rule 1.5(w), the term ``Regular Trading 
Hours'' means the time between 9:30 a.m. and 4:00 p.m. E.T.

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[[Page 13943]]

    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. Pricing information regarding Cash Equivalents in 
which the Fund may invest is generally available through nationally 
recognized data services providers, such as Reuters and Bloomberg, 
through subscription agreements. The closing prices and settlement 
prices of the Index Components (i.e., the first- and second-month VIX 
Futures Contracts) will 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. The CFE also provides delayed futures information on 
current and past trading sessions and market news free of charge on its 
website. Complete real-time data for component VIX Futures Contracts 
underlying the Index, including the specific contract specifications of 
Index Components (i.e., first-month and second-month VIX Futures 
Contracts), is available by subscription from Reuters and Bloomberg.
    The Commission believes that the Exchange's rules regarding trading 
halts further help to ensure the maintenance of fair and orderly 
markets for the Shares, which is consistent with the protection of 
investors and the public interest. Trading in the Shares 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. In addition, the Exchange will halt trading in the Shares 
under the conditions specified in BZX Rule 11.18 (Trading Halts Due to 
Extraordinary Market Volatility). BZX Rule 14.11(f)(4)(c)(ii) 
enumerates additional circumstances under which the Exchange will 
consider the suspension of trading in and will commence delisting 
proceedings for the Shares.
    The Commission finds that the Exchange's proposal regarding 
safeguarding material non-public information relating to the Fund's 
portfolio is designed to prevent fraudulent and manipulative acts and 
practices and to protect investors and the public interest. 
Specifically, the Exchange states that 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 
of and/or changes to the portfolio, and will be subject to procedures 
designed to prevent the use and dissemination of material non-public 
information regarding the portfolio. Moreover, trading of the Shares 
will be subject to BZX Rule 14.11(f)(4)(D), which sets forth certain 
restrictions on Members \44\ acting as registered Market Makers \45\ in 
Trust Issued Receipts to facilitate surveillance. In addition, the 
Exchange has a general policy prohibiting the distribution of material, 
non-public information by its employees.
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    \44\ As defined in BZX Rule 1.5(n), the term ``Member'' means 
any registered broker or dealer that has been admitted to membership 
in the Exchange.
    \45\ As defined in BZX Rule 1.5(l), the term ``Market Maker'' 
means a Member that acts as a Market Maker pursuant to Chapter XI of 
the BZX Rules.
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    Furthermore, the Commission finds that the Exchange's proposal 
regarding surveillance of the Shares and the underlying investments is 
designed to prevent fraudulent and manipulative acts and practices and 
to protect investors and the public interest. The Exchange or the 
Financial Industry Regulatory Authority (``FINRA''), on behalf of the 
Exchange, or both, will communicate and may obtain information 
regarding trading in the Shares and the underlying listed instruments, 
including listed derivatives held by the Fund, with the Intermarket 
Surveillance Group (``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. The Exchange states that 
trading of the Shares through the Exchange will be subject to the 
Exchange's surveillance procedures for derivative products, and these 
procedures are adequate to properly monitor Exchange trading of the 
Shares during all trading sessions and to deter and detect violations 
of Exchange rules and applicable federal securities laws. In addition, 
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.
    The Commission finds that the Exchange's rules relating to trading 
of the Shares on the Exchange are 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. Specifically, 
the Exchange states that:

    (1) 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;
    (2) The Shares will conform to the initial and continued listing 
criteria under BZX Rule 14.11(f);
    (3) Pursuant to BZX Rule 14.11(a), all statements and 
representations made in the filing regarding the Index composition, 
description of the portfolio or reference assets, limitations on 
portfolio holdings or reference assets, dissemination and 
availability of the Index, reference assets, and IIV, or the 
applicability of Exchange listing rules specified in the filing 
shall constitute continued listing requirements for the Shares. The 
issuer will advise the Exchange of any failure by the Fund 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.
    (4) The Exchange has the appropriate rules to facilitate 
transactions in the Shares during all trading sessions;
    (5) Prior to the commencement of trading, the Exchange will 
inform its Members in an Information Circular of the special 
characteristics and risks associated with trading the Shares; \46\
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    \46\ The Exchange states that the Information Circular will 
discuss the following: (a) The procedures for purchases and 
redemptions of Shares in Creation Units (and that Shares are not 
individually redeemable); (b) BZX Rule 3.7, which imposes 
suitability obligations on Members with respect to recommending 
transactions in the Shares to customers; (c) 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, and specifically provides that ``[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;'' (d) how information regarding the IIV and 
the Fund's holdings is disseminated; (e) the risks involved in 
trading the Shares during the Pre-Opening and After Hours Trading 
Sessions (as such terms are defined in BZX Rules) when an updated 
IIV will not be calculated or publicly disseminated; (f) the 
requirement that Members deliver a prospectus to investors 
purchasing newly issued Shares prior to or concurrently with the 
confirmation of a transaction; and (g) trading information.

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[[Page 13944]]

    (6) FINRA has implemented increased sales practice and customer 
margin requirements for FINRA members applicable to inverse, 
leveraged and inverse 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). Members that carry customer accounts will be 
required to follow the FINRA guidance set forth in these notices;
    (7) For initial and continued listing, the Fund and the Trust 
must be in compliance with Rule 10A-3 under the Act; \47\ and
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    \47\ 17 CFR 240.10A-3.
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    (8) A minimum of 100,000 Shares of the Fund will be outstanding 
at the commencement of trading on the Exchange.

    Accordingly, the Commission finds that the proposed rule change, as 
modified by Amendment Nos. 1 and 3, is consistent with Section 6(b)(5) 
of the Act \48\ and the rules and regulations thereunder applicable to 
a national securities exchange.
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    \48\ 15 U.S.C. 78f(b)(5).
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IV. Solicitation of Comments on Amendment Nos. 1 and 3 to the Proposed 
Rule Change

    Interested persons are invited to submit written views, data, and 
arguments concerning whether Amendment Nos. 1 and 3 are 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 April 1, 2021.

V. Accelerated Approval of the Proposed Rule Change, as Modified by 
Amendment Nos. 1 and 3

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment Nos. 1 and 3, prior to the thirtieth 
day after the date of publication of notice of the filing of Amendment 
Nos. 1 and 3 in the Federal Register. In Amendment No. 1, among other 
things,\49\ the Exchange represents that the Funds' participation, on 
any given day, in VIX Futures Contracts, will be limited to no more 
than ten percent of the VIX Futures Contracts traded on CFE during any 
Rebalance Period, and in the event that the Funds expect to hit the ten 
percent threshold during the primary Rebalance Period, the Funds would 
extend their respective rebalances into an Extended Rebalance Period. 
In Amendment No. 3, the Exchange represents that the Fund will notify 
both the Exchange and the Commission in the event that the Fund 
participates in an Extended Rebalance Period as soon as practicable, 
but no later than 9:00 a.m. E.T. on the trading day following the 
event. The changes to the proposal and additional information in 
Amendment Nos. 1 and 3 assist the Commission in evaluating the 
Exchange's proposal and in determining that it is consistent with the 
Act. Accordingly, the Commission finds good cause, pursuant to Section 
19(b)(2) of the Act,\50\ to approve the proposed rule change, as 
modified by Amendment Nos. 1 and 3, on an accelerated basis.
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    \49\ See supra note 8.
    \50\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\51\ that the proposed rule change (SR-CboeBZX-2020-070), as 
modified by Amendment Nos. 1 and 3, be, and hereby is, approved on an 
accelerated basis.
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    \51\ Id.
    \52\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\52\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-05027 Filed 3-10-21; 8:45 am]
BILLING CODE 8011-01-P