Document ID: SEC-2019-1657-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2019-11-06T05:00Z

[Federal Register Volume 84, Number 215 (Wednesday, November 6, 2019)]
[Notices]
[Pages 59900-59903]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-24189]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87437; File No. SR-NYSEArca-2019-62]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Amendment No. 1, and Order Granting Accelerated Approval of a 
Proposed Rule Change, as Modified by Amendment No. 1, Relating to the 
Listing and Trading of Shares of the Innovator MSCI EAFE Power Buffer 
ETFs and Innovator MSCI Emerging Markets Power Buffer ETFs, Series of 
the Innovator ETFs Trust, Under NYSE Arca Rule 8.600-E

October 31, 2019.

I. Introduction

    On August 29, 2019, 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 
relating to the listing and trading of shares (``Shares'') of the 
Innovator MSCI EAFE Power Buffer ETFs and Innovator MSCI Emerging 
Markets Power Buffer ETFs (each a ``Fund'' and collectively the 
``Funds''), series of the Innovator ETFs Trust (``Trust''), under NYSE 
Arca Rule 8.600-E, which governs the listing and trading of Managed 
Fund Shares. The proposed rule change was published for comment in the 
Federal Register on September 18, 2019.\3\ On October 16, 2019, the 
Exchange filed Amendment No. 1 to the proposed rule change, which 
replaced and superseded the proposed rule change as originally 
filed.\4\ The Commission has received no comments on the proposed rule 
change. 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 No. 1, 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. 86948 (September 12, 
2019), 84 FR 49131.
    \4\ In Amendment No. 1, the Exchange: (1) Clarified that it is 
submitting this proposal in order to allow each Fund to hold listed 
derivatives (i.e., FLEX and standardized options on the Indexes and 
on ETFs that track the Indexes) in a manner that does not comply 
with Commentary .01(d)(2) to NYSE Arca Rule 8.600-E; (2) clarified 
the Funds' use of standardized options; (3) specified that while the 
Funds will invest primarily in FLEX and standardized options, they 
may also invest in cash and cash equivalents; and (4) made other 
technical, clarifying, and conforming changes. Amendment No. 1 is 
available at: https://www.sec.gov/comments/sr-nysearca-2019-62/srnysearca201962-6310013-193523.pdf.
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II. Description of the Proposed Rule Change, as Modified by Amendment 
No. 1

    The Exchange proposes to: (1) Permit the continued listing and 
trading of Shares of the Innovator MSCI EAFE Power Buffer ETF (July 
Series) and Innovator MSCI Emerging Markets Power Buffer ETF (July 
Series); (2) list and trade Shares of up to an additional eleven 
Innovator MSCI EAFE Power Buffer ETF Series of the Trust (``EAFE Power 
Buffer Funds''); and (3) list and trade Shares of up to an additional 
eleven Innovator MSCI Emerging Markets Power Buffer ETF Series of the 
Trust (``Emerging Markets Power Buffer Funds'').\5\ Innovator Capital 
Management, LLC (``Adviser'') is the investment adviser to the Funds 
and Milliman Financial Risk Management LLC (``Sub-Adviser'') is the 
sub-adviser.
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    \5\ The Trust is registered with the Commission as an investment 
company and has filed a registration statement on Form N-1A under 
the Securities Act of 1933 and the Investment Company Act of 1940 
for each of the Innovator MSCI EAFE Power Buffer ETF (July Series 
and October Series) and Innovator MSCI Emerging Markets Power Buffer 
ETF (July Series and October Series).
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    The investment objective of the EAFE Power Buffer Funds is to 
provide investors with returns that match those of the MSCI EAFE 
Investable Market Index--Price Return (``MSCI EAFE Index'') over a 
period of approximately one year, while providing a level of protection 
from MSCI EAFE Index losses. The investment objective of the

[[Page 59901]]

Emerging Markets Power Buffer Funds is to provide investors with 
returns that match those of the MSCI Emerging Markets Investable Market 
Index--Price Return (``MSCI Emerging Markets Index'' and, together with 
the MSCI EAFE Index, the ``Indexes'') over a period of approximately 
one year, while providing a level of protection from MSCI Emerging 
Markets Index losses.
    In particular, the Funds are actively managed funds that employ a 
defined outcome strategy \6\ that: (1) For the EAFE Power Buffer Funds, 
seeks to provide investment returns during the outcome period that 
match the gains of the MSCI EAFE Index, up to a maximized annual return 
(``EAFE Cap Level''),\7\ while guarding against a decline in the MSCI 
EAFE Index of the first 15% (``EAFE Power Buffer Strategy''); and (2) 
for the Emerging Markets Power Buffer Funds, seeks to provide 
investment returns during the outcome period that match the gains of 
the MSCI Emerging Markets Index, up to a maximized annual return 
(``Emerging Markets Cap Level''),\8\ while guarding against a decline 
in the MSCI Emerging Markets Index of the first 15% (``Emerging Markets 
Power Buffer Strategy'').
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    \6\ Defined outcome strategies are designed to participate in 
market gains and losses within pre-determined ranges over a 
specified period (i.e., point to point). These outcomes are 
predicated on the assumption that an investment vehicle employing 
the strategy is held for the designated outcome periods.
    \7\ The EAFE Cap Level will be determined with respect to each 
EAFE Power Buffer Fund on the inception date of the EAFE Power 
Buffer Fund and at the beginning of each outcome period and is 
determined based on the price of the FLEX options acquired by the 
EAFE Power Buffer Fund at that time. The EAFE Cap Level will be 
determined only once at the beginning of each outcome period and not 
within an outcome period.
    \8\ The Emerging Markets Cap Level will be determined with 
respect to each Emerging Markets Power Buffer Fund on the inception 
date of the Emerging Markets Power Buffer Fund and at the beginning 
of each outcome period and is determined based on the price of the 
FLEX options acquired by the Emerging Markets Power Buffer Fund at 
that time. The Emerging Markets Cap Level will be determined only 
once at the beginning of each outcome period and not within an 
outcome period.
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    More specifically, pursuant to the EAFE Power Buffer Strategy, each 
EAFE Power Buffer Fund's portfolio managers will seek to produce the 
following outcomes during the outcome period:
     If the MSCI EAFE Index appreciates over the outcome 
period, the EAFE Power Buffer Fund will seek to provide shareholders 
with a total return that matches that of the MSCI EAFE Index, up to and 
including the EAFE Cap Level;
     If the MSCI EAFE Index depreciates over the outcome period 
by 15% or less, the EAFE Power Buffer Fund will seek to provide a total 
return of zero; and
     If the MSCI EAFE Index decreases over the outcome period 
by more than 15%, the EAFE Power Buffer Fund will seek to provide a 
total return loss that is 15% less than the percentage loss on the MSCI 
EAFE Index with a maximum loss of approximately 85%.
    In addition, pursuant to the Emerging Markets Power Buffer 
Strategy, each Emerging Markets Power Buffer Fund's portfolio managers 
will seek to produce the following outcomes during the outcome period:
     If the MSCI Emerging Markets Index appreciates over the 
outcome period, the Emerging Markets Power Buffer Fund will seek to 
provide shareholders with a total return that matches that of the MSCI 
Emerging Markets Index, up to and including the Emerging Markets Cap 
Level;
     If the MSCI Emerging Markets Index depreciates over the 
outcome period by 15% or less, the Emerging Markets Power Buffer Fund 
will seek to provide a total return of zero;
     If the MSCI Emerging Markets Index decreases over the 
outcome period by more than 15%, the Emerging Markets Power Buffer Fund 
will seek to provide a total return loss that is 15% less than the 
percentage loss on the MSCI Emerging Markets Index with a maximum loss 
of approximately 85%.
    Under normal market conditions: \9\ (1) Each EAFE Power Buffer Fund 
will invest primarily in FLEX options or standardized options contracts 
listed on a U.S. exchange that reference either the MSCI EAFE Index or 
ETFs \10\ that track the MSCI EAFE Index; and (2) each Emerging Markets 
Power Buffer Fund will invest primarily in FLEX options or standardized 
options contracts listed on a U.S. exchange that reference either the 
MSCI Emerging Markets Index or ETFs \11\ that track the MSCI Emerging 
Markets Index.\12\ Each of the Funds may invest its net assets (in the 
aggregate) in other investments (i.e., cash or cash equivalents \13\) 
which the Adviser or Sub-Adviser believes will help each Fund to meet 
its investment objective and that will be disclosed at the end of each 
trading day.
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    \9\ The term ``normal market conditions'' is defined in NYSE 
Arca Rule 8.600-E(c)(5).
    \10\ For purposes of this proposal, the term ``ETFs'' means 
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.
    \11\ See supra note 10.
    \12\ Options on the Indexes are traded on Cboe Exchange, Inc. 
(``Cboe Options''). Options on ETFs based on the Indexes are listed 
and traded in the U.S. on national securities exchanges. The 
Exchange, Cboe Options, and all other national securities exchanges 
are members of the Intermarket Surveillance Group (``ISG''). 
Moreover, Cboe Options and the Exchange are members of the Options 
Regulatory Surveillance Authority.
    \13\ Cash equivalents are the short-term instruments enumerated 
in Commentary .01(c) to NYSE Arca Rule 8.600-E.
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    According to the Exchange, it is submitting this proposal in order 
to allow each Fund to hold listed derivatives (i.e., FLEX and 
standardized options on the Indexes and on ETFs that track the Indexes) 
in a manner that does not comply with Commentary .01(d)(2) to NYSE Arca 
Rule 8.600-E. Commentary .01(d)(2) to NYSE Arca Rule 8.600-E provides 
that the aggregate gross notional value of listed derivatives based on 
any five or fewer underlying reference assets shall not exceed 65% of 
the weight of the portfolio (including gross notional exposures), and 
the aggregate gross notional value of listed derivatives based on any 
single underlying reference asset shall not exceed 30% of the weight of 
the portfolio (including gross notional exposures).

III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change, as modified by Amendment No. 1, is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange.\14\ In particular, the 
Commission finds that the proposed rule change, as modified by 
Amendment No. 1, is consistent with Section 6(b)(5) of the Act,\15\ 
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. The Commission also finds that the proposal is consistent 
with Section 11A(a)(1)(C)(iii) of the Act,\16\ which sets forth 
Congress' finding that it is in the public interest and appropriate for 
the protection of investors and the maintenance of fair and orderly 
markets to assure the availability to brokers, dealers and investors of 
information

[[Page 59902]]

with respect to quotations for and transactions in securities.
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    \14\ 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).
    \15\ 15 U.S.C. 78f(b)(5).
    \16\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
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    According to the Exchange, intra-day and closing price information 
regarding Index options and ETF options is available from the Options 
Price Reporting Authority, Cboe Options' website, and from major market 
data vendors. FINRA's Trade Reporting and Compliance Engine (``TRACE'') 
will be a source of price information for certain fixed income 
securities to the extent transactions in such securities are reported 
to TRACE. Price information regarding U.S. government securities and 
other cash equivalents generally may be obtained from brokers and 
dealers who make markets in such securities or through nationally 
recognized pricing services through subscription agreements. 
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. Information 
regarding the previous day's closing price and trading volume 
information for the Shares will be published daily in the financial 
section of newspapers. Quotation and last sale information for the 
Shares will be available via the Consolidated Tape Association high-
speed line. In addition, the Portfolio Indicative Value, as defined in 
NYSE Arca Rule 8.600-E(c)(3), will be widely disseminated by one or 
more major market data vendors at least every 15 seconds during the 
Core Trading Session.
    The Commission also 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 when 
a reasonable degree of transparency cannot be assured. Under NYSE Arca 
Rule 8.600-E(d)(2)(D), if the Exchange becomes aware that the net asset 
value (``NAV'') or the Disclosed Portfolio (as defined in NYSE Arca 
Rule 8.600-E(c)(2)) is not disseminated to all market participants at 
the same time, the Exchange is required to halt trading in such series 
of Managed Fund Shares. In addition, the Exchange represents that if a 
Fund is not in compliance with the applicable listing requirements, the 
Exchange will commence delisting procedures under NYSE Arca Rule 5.5-
E(m). The Exchange also states that it has a general policy prohibiting 
the distribution of material, non-public information by its employees. 
Further, the issuer currently provides and maintains for the July 
Series, and will provide and maintain for any future series of a Fund, 
a publicly available web tool on its website that provides existing and 
prospective shareholders with certain information to help inform 
investment decisions. The information provided includes the start and 
end dates of the current outcome period, the time remaining in the 
outcome period, the Funds' current NAV, each Fund's cap for the outcome 
period and the maximum investment gain available up to the cap for a 
shareholder purchasing Shares at the current NAV. The web tool also 
provides information regarding each Fund's buffer. This information 
includes the remaining buffer available for a shareholder purchasing 
Shares at the current NAV or the amount of losses that a shareholder 
purchasing Shares at the current NAV would incur before benefitting 
from the protection of the buffer.
    The Shares do not qualify for generic listing because the Funds 
will not satisfy the requirements of Commentary .01(d)(2) to NYSE Arca 
Rule 8.600-E that the aggregate gross notional value of listed 
derivatives based on any five or fewer underlying reference assets 
shall not exceed 65% of the weight of the portfolio (including gross 
notional exposures) and the aggregate gross notional value of listed 
derivatives based on any single underlying reference asset shall not 
exceed 30% of the weight of the portfolio (including gross notional 
exposures). As noted above, under normal market conditions: (1) Each 
EAFE Power Buffer Fund will invest primarily in FLEX Options or 
standardized options contracts listed on a U.S. exchange that reference 
either the MSCI EAFE Index or ETFs that track the MSCI EAFE Index; and 
(2) each Emerging Markets Power Buffer Fund will invest primarily in 
FLEX Options or standardized options contracts listed on a U.S. 
exchange that reference either the MSCI Emerging Markets Index or ETFs 
that track the MSCI Emerging Markets Index. The Commission notes that, 
although the Funds' holdings in these listed derivatives will not meet 
the requirements of Commentary .01(d)(2) to NYSE Arca Rule 8.600-E, the 
Indexes are broad-based; the ETFs will be listed and traded in the U.S. 
on national securities exchanges; and all Index and ETF options 
contacts held by the Funds 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, all of which 
help to mitigate concerns about the prices of the Shares being 
susceptible to manipulation.
    Additionally, in support of this proposal, the Exchange represents 
that:
    (1) With the exception of the requirements of Commentary .01(d)(2), 
each Fund will comply with the initial and continued listing standards 
under NYSE Arca Rule 8.600-E.
    (2) Trading in the Shares will be subject to the existing trading 
surveillances, administered by FINRA on behalf of the Exchange, or by 
regulatory staff of the Exchange, which are designed to detect 
violations of Exchange rules and applicable federal securities laws.
    (3) For initial and continued listing, the Funds will be in 
compliance with Rule 10A-3 under the Act,\17\ as provided by NYSE Arca 
Rule 5.3-E.
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    \17\ 17 CFR 240.10A-3.
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    (4) With respect to each of the proposed additional eleven series 
of each Fund, a minimum of 100,000 Shares will be outstanding at the 
commencement of trading on the Exchange.
    This approval order is based on all of the Exchange's statements 
and representations, including those set forth above and in Amendment 
No. 1.

IV. Solicitation of Comments on Amendment No. 1 to the Proposed Rule 
Change

    Interested persons are invited to submit written data, views, and 
arguments concerning whether Amendment No. 1 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-NYSEArca-2019-62 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-2019-62. 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

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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-2019-62, and should 
be submitted on or before November 27, 2019.

V. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment No. 1

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment No. 1, prior to the thirtieth day 
after the date of publication of notice of the filing of Amendment No. 
1 in the Federal Register. As discussed above, in Amendment No. 1, the 
Exchange: (1) Clarified that it is submitting this proposal in order to 
allow each Fund to hold listed derivatives (i.e., FLEX and standardized 
options on the Indexes and on ETFs that track the Indexes) in a manner 
that does not comply with Commentary .01(d)(2) to NYSE Arca Rule 8.600-
E; (2) clarified the Funds' use of standardized options; (3) specified 
that while the Funds will invest primarily in FLEX and standardized 
options, they may also invest in cash and cash equivalents; and (4) 
made other technical, clarifying, and conforming changes. The 
Commission believes that Amendment No. 1 does not raise any novel 
regulatory issues and provides additional clarity to the proposal. 
Accordingly, the Commission finds good cause, pursuant to Section 
19(b)(2) of the Act,\18\ to approve the proposed rule change, as 
modified by Amendment No. 1, on an accelerated basis.
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    \18\ 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,\19\ that the proposed rule change (SR-NYSEArca-2019-62), as 
modified by Amendment No. 1, be, and it hereby is, approved on an 
accelerated basis.
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    \19\ Id.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-24189 Filed 11-5-19; 8:45 am]
BILLING CODE 8011-01-P