Document ID: SEC-2016-1883-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2016-10-24T04:00Z

[Federal Register Volume 81, Number 205 (Monday, October 24, 2016)]
[Notices]
[Pages 73179-73182]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-25575]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79111; File No. SR-NYSEArca-2016-96]

Self-Regulatory Organizations; NYSE Arca, Inc.; Order Instituting 
Proceedings To Determine Whether To Approve or Disapprove a Proposed 
Rule Change To Amend NYSE Arca Equities Rule 8.700 and To List and 
Trade Shares of the Managed Emerging Markets Trust Under Proposed 
Amended NYSE Arca Equities Rule 8.700

October 18, 2016.

I. Introduction

    On July 1, 2016, NYSE Arca, Inc. (``Exchange'') 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 amend NYSE Arca 
Equities Rule 8.700 and to list and trade shares (``Shares'') of the 
Managed Emerging Markets Trust (``Trust'') under proposed amended NYSE 
Arca Equities Rule 8.700. The proposed rule change was published for 
comment in the Federal Register on July 21, 2016.\3\ On August 30, 
2016, 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\ The 
Commission received no comments on the proposed rule change. This order 
institutes proceedings under Section 19(b)(2)(B) of

[[Page 73180]]

the Act \6\ to determine whether to approve or disapprove the proposed 
rule change.
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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. 78345 (July 15, 
2016), 81 FR 47447 (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 78727, 81 FR 61268 
(September 6, 2016). The Commission designated October 19, 2016 as 
the date by which the Commission shall either approve or disapprove, 
or institute proceedings to determine whether to disapprove, the 
proposed rule change.
    \6\ 15 U.S.C. 78s(b)(2)(B).
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II. Exchange's Description of the Proposal

A. Amendments to NYSE Arca Equities Rule 8.700

    NYSE Arca Equities Rule 8.700 permits the trading of Managed Trust 
Securities on the Exchange. A Managed Trust Security is a security that 
is registered under the Securities Act of 1933, as amended, and (i) is 
issued by a trust that (1) is a commodity pool as defined in the 
Commodity Exchange Act (``CEA'') and regulations thereunder, and that 
is managed by a commodity pool operator registered with the Commodity 
Futures Trading Commission (``CFTC'') and (2) holds long and/or short 
positions in exchange-traded futures contracts and/or certain currency 
forward contracts selected by the trust's advisor consistent with the 
trust's investment objectives, which will only include exchange-traded 
futures contracts involving commodities, currencies, stock indices, 
fixed income indices, interest rates and sovereign, private and 
mortgage or asset backed debt instruments, and/or forward contracts on 
specified currencies, each as disclosed in the trust's prospectus; and 
(ii) is issued and redeemed continuously in specified aggregate amounts 
at the next applicable net asset value (``NAV'').\7\ The Exchange 
proposes to amend NYSE Arca Equities Rule 8.700 to permit the use of 
swaps on equity indices, fixed income indices, commodity indices, 
commodities, or interest rates.
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    \7\ See NYSE Arca Equities Rule 8.700(c)(1).
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B. Proposal To List and Trade Shares of the Trust

    The Exchange proposes to list and trade Shares of the Trust under 
proposed amended NYSE Arca Equities Rule 8.700. The Trust is a Delaware 
statutory trust that will issue Shares representing fractional 
undivided beneficial interests in the Trust. The Trust is a commodity 
pool as defined in the CEA and the regulations of the CFTC.\8\ The 
Trust will be operated by Artivest Advisors LLC, a Delaware limited 
liability company (``Sponsor'') that is also the Trust's adviser 
(``Adviser''), and will be registered under the CEA as a commodity pool 
operator. The sole member of the Sponsor is Artivest Holdings, Inc., a 
Delaware corporation. The Adviser is the commodity trading advisor of 
the Trust and will at all times be either registered as a commodity 
trading advisor or properly exempt from such registration under the 
CEA. The Adviser is not a broker-dealer and is not affiliated with a 
broker-dealer. In the event (a) the Adviser or any sub-adviser becomes 
registered as a broker-dealer or newly affiliated with a broker-dealer, 
or (b) any new adviser or sub-adviser becomes affiliated with a broker-
dealer, it will implement a fire wall with respect to such broker-
dealer regarding access to information concerning the composition of 
and changes to the Trust's portfolio and will be subject to procedures 
designed to prevent the use and dissemination of material non-public 
information regarding such portfolio.\9\
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    \8\ According to the Exchange, the Trust will not be an 
investment company registered under the Investment Company Act of 
1940 (``1940 Act'') and will not be required to register under the 
1940 Act.
    \9\ The activities of the Trust will be limited to (1) issuing 
Baskets (i.e., blocks of 100,000 Shares) in exchange for cash, (2) 
paying out of Trust assets any Trust expenses and liabilities not 
assumed by the Sponsor, (3) delivering proceeds consisting of cash 
in exchange for Baskets surrendered for redemption, (4) depositing 
any required margin in the form of cash or other eligible assets 
with domestic futures commission merchants, foreign futures brokers, 
or other financial intermediaries or dealers, and (5) investing its 
cash, at the direction of the Adviser, in a portfolio of futures 
contracts, forward contracts, and swaps.
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    The Bank of New York Mellon, a New York banking corporation, is the 
trustee of the Trust. Wilmington Trust, National Association, a 
national banking association, is the Delaware trustee of the Trust. The 
Bank of New York Mellon also is the administrator, custodian, 
processing agent, and settlement agent of the Trust. The Trust has 
engaged Foreside Fund Services, LLC to act as a distributor on its 
behalf.
Principal and Other Trust Investments
    The Trust will pursue long-term total returns by seeking to provide 
both (1) a long-only exposure to one or more emerging markets equity 
indices (``index exposure'') and (2) ``alpha'' returns that are 
additive to, and are not correlated with, the index exposure (measured 
over rolling 5-year periods), while seeking to control overall downside 
risk and volatility.
    According to the Exchange, the Trust will primarily trade and 
invest in futures on emerging market equity indices \10\ and foreign 
currency forward contracts, as discussed in more detail below. The 
Trust's portfolio may also contain cash which may be used, as needed, 
to secure the Trust's trading obligations with respect to its trading 
positions. Although the Trust's investment objective is not primarily 
to hold significant amounts of cash, cash may comprise a significant 
portion of the NAV of the Trust. Moreover, in order to collateralize 
futures contracts and forward contracts, the Trust may invest in U.S. 
government debt instruments, which are U.S. Treasury bills, notes, and 
bonds of varying maturities that are backed by the full faith and 
credit of the United States government, or other short-term securities 
(in each case eligible as margin deposits under the rules of the 
Exchange), which may include money market instruments (``Short-Term 
Securities''). Although the Trust's investment objective is not 
primarily to trade and invest in Short-Term Securities, Short-Term 
Securities may comprise a significant portion of the NAV of the Trust.
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    \10\ The Trust expects to trade futures contracts on U.S. 
exchanges and non-U.S. exchanges. Not more than 10% of the net 
assets of the Trust in the aggregate invested in futures contracts 
will consist of futures contracts whose principal market is not a 
member of the Intermarket Surveillance Group (``ISG'') or is a 
market with which the Exchange does not have a comprehensive 
surveillance sharing agreement.
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Index Exposure Portfolio Construction
    According to the Exchange, the Trust will seek to maintain constant 
exposure to one or more emerging markets equity indices by holding long 
positions in emerging markets index futures contracts.\11\ Generally, 
the Adviser will seek to maintain an emerging markets index exposure 
equal to 100% of the Trust's net assets, although this may vary from 
time to time depending on market conditions. Initially, the Trust will 
hold long MSCI Emerging Markets Index \12\ futures contracts to achieve 
its index exposure.\13\ The Adviser may in the future invest in 
additional or different emerging markets index futures contracts.\14\
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    \11\ According to the Exchange, the Adviser will look at a 
variety of factors to determine whether a country is an ``emerging 
market.'' Currently, the Adviser views countries as ``emerging 
markets'' if they are considered to be developing, emerging, or 
frontier by sources such as MSCI, the International Monetary Fund, 
the World Bank, the International Finance Corporation, the United 
Nations, The Economist magazine, Standard & Poor's and Dow Jones, or 
if they are countries with a stock market capitalization of less 
than 5% of the MSCI World Index. Additional information regarding 
emerging markets as related to this proposal can be found in the 
Notice, supra note 3, 81 FR at 47449-50.
    \12\ Information regarding the MSCI Emerging Markets Index can 
be found in the Notice, supra note 3, 81 FR at 47450.
    \13\ ICE Futures U.S. has been licensed to create futures 
contracts on the MSCI Emerging Markets Index. ICE Futures U.S. is a 
member of the ISG.
    \14\ Information regarding rebalancing and risk management for 
the index portfolio can be found in the Notice, supra note 3, 81 FR 
at 47450 and 74752.

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[[Page 73181]]

Alpha Portfolio Construction
    According to the Exchange, the Trust's alpha strategy \15\ will 
seek to provide returns that are independent of, and uncorrelated to, 
the index exposure, by trading and investing primarily in futures 
contracts and forward contracts relating to emerging markets. The alpha 
portfolio primarily will be composed of futures contracts on emerging 
market equity indices and foreign currency forward contracts. According 
to the Exchange, the Adviser anticipates that as the Trust grows 
larger, it may also, in certain limited circumstances, invest in 
exchange-traded swaps, swaps accepted for central clearing (``cleared 
swaps''), and swaps that are not accepted for central clearing 
(``uncleared swaps''). These limited circumstances include the 
following:
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    \15\ According to the Exchange, the Adviser will pursue a 
strategy based on fundamental analysis and will make investment 
decisions based on its view of the fundamental value of various 
financial instruments relative to market prices and expectations. To 
construct the alpha portfolio, the Adviser will apply both 
quantitative and qualitative analysis to market and economic data to 
generate investment ideas, to trade and invest on a discretionary 
basis, and to manage portfolio risk. The Adviser will form 
conclusions regarding future economic conditions and future 
financial instruments pricing based on its review and analysis of 
macroeconomic factors. From time to time, the Adviser will form 
thematic, macroeconomic-based ``alpha views'' regarding its desired 
exposures to investment themes. Additional information regarding the 
alpha strategy can be found in the Notice, supra note 3, 81 FR at 
47449.
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     When futures contracts are not available or market 
conditions do not permit investing in futures contracts (for example, a 
particular futures contract may not exist or may trade only on an 
exchange that has not yet been approved by the Trust); and
     When there are position limits, price limits or 
accountability limits on futures contracts.
    According to the Exchange, swaps would only be used by the Trust as 
a substitute for futures contracts in the limited circumstances 
described above when the Adviser has determined that it is necessary to 
use swaps in order for the Trust to remain consistent with the Trust's 
investment objective. Further, the Adviser expects that the Trust's use 
of swaps, if any, will be of a de minimis nature. Moreover, to the 
extent that the Trust invests in swaps, it would first make use of 
exchange-traded swaps if such swaps are available. If an investment in 
exchange-traded swaps is unavailable, then the Trust would invest in 
cleared swaps that clear through derivatives clearing organizations 
that satisfy the Trust's criteria. If an investment in cleared swaps is 
unavailable, then the Trust would invest in other swaps, including 
uncleared swaps in the over-the-counter (``OTC'') market. However, no 
more than 20% of the portfolio may be invested, on both an initial and 
an ongoing basis, in OTC swaps.\16\
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    \16\ Information regarding rebalancing and risk management for 
the alpha portfolio can be found in the Notice, supra note 3, 81 FR 
at 47452.
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Alpha Futures Contracts
    The Adviser expects that 75%-90% of the portfolio's alpha exposure 
will be obtained via futures contracts. The Trust expects to take long 
or short positions in a wide variety of commodity futures contracts 
(including metals, agriculturals, energies, and softs) and financial 
futures contracts (including interest rates, currencies and currency 
indices, U.S. and non-U.S. equity indices, and government bond futures 
contracts).
Alpha Forward Contracts
    The Trust may enter into foreign currency forward contracts, which 
the Adviser expects may make up 10%-25% of the portfolio's alpha 
exposure.\17\ The Adviser does not currently expect to engage in any 
transactions that would be considered ``retail forex'' transactions for 
purposes of the CEA. The Trust will only enter into foreign currency 
forward contracts related to foreign currencies that have significant 
foreign exchange turnover and are included in the Bank for 
International Settlements Triennial Central Bank Survey, September 2013 
(``BIS Survey''). Specifically, the Trust may enter into foreign 
currency forward contracts that provide exposure to such currencies 
selected from the top 40 currencies (as measured by percentage share of 
average daily turnover for the applicable month and year) included in 
the BIS Survey.\18\
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    \17\ The Trust may enter into deliverable forward contracts or 
non-deliverable forward contracts.
    \18\ The Trust's forward contracts will be collateralized to the 
extent required by the relevant counterparties. The counterparties 
to the Trust's forward contracts are expected to be brokers, 
dealers, and other financial institutions. The Adviser will seek to 
diversify the Trust's counterparty exposure but may from time to 
time have concentrated exposure to one or more counterparties. 
However, the Adviser represents that it will not concentrate risks 
with a single counterparty and will establish policies and 
procedures to manage counterparty concentration and monitor 
counterparty creditworthiness. The policies and procedures to 
monitor counterparty creditworthiness will consider the credit 
rating of the counterparty and any past experience with the 
counterparty.
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III. Proceedings To Determine Whether To Approve or Disapprove SR-
NYSEArca-2016-96 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \19\ 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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    \19\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\20\ 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.'' \21\
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    \20\ Id.
    \21\ 15 U.S.C. 78f(b)(5).
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    Under the proposal, an authorized participant may place a purchase 
or redemption order to create or redeem Baskets of Shares on any 
``Eligible Business Day'' (rather than on any Business Day). The 
proposal defines ``Eligible Business Day'' to mean any Business Day 
\22\ other than a Business Day which immediately precedes two or more 
days on which there is no scheduled exchange trading session for one or 
more futures contracts purchased or sold, or that may be purchased or 
sold, by the Trust on that day. Moreover, purchase and redemption 
orders must be placed by 1:15 p.m. Eastern Time or the close of regular 
trading on the New York Stock Exchange, whichever is earlier (``Cutoff 
Time''). Purchase and redemption

[[Page 73182]]

orders received after the Cutoff Time on an Eligible Business Day, or 
on a day that is not an Eligible Business Day, will be treated as 
received on the next Eligible Business Day. The Exchange does not 
discuss whether these aspects of the proposal would have any impact on 
the trading of the Shares, including any impact on arbitrage. The 
Commission seeks commenters' views on these aspects of the proposal, 
and on whether the Exchange's statements relating to the creation and 
redemption process support a determination that the listing and trading 
of the Shares would be consistent with Section 6(b)(5) of the Act, 
which, among other things, requires that the rules of an 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.
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    \22\ Under the proposal, ``Business Day'' is defined to mean any 
day other than (a) a Saturday or Sunday; (b) a day on which the 
Exchange is closed for regular trading; (c) a day on which any of 
the Adviser, the processing agent, the settlement agent, the trust 
administrator, the Sponsor or the trustee is authorized or required 
by law or regulation to remain closed; or (d) a day on which the 
Federal Reserve wire transfer system is closed for cash wire 
transfers.
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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 proposal 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, any request for an 
opportunity to make an oral presentation.\23\
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    \23\ Section 19(b)(2) of the Act, as amended by the Securities 
Acts Amendments of 1975, Pub. L. 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 proposal should be approved or 
disapproved by November 14, 2016. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
November 28, 2016. The Commission asks that commenters address the 
sufficiency of the Exchange's statements in support of the proposal, 
which are set forth in the Notice,\24\ in addition to any other 
comments they may wish to submit about the proposed rule change.
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    \24\ See supra note 3.
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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-2016-96 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-2016-96. 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 Web site (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 Web site 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; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NYSEArca-2016-96 and should 
be submitted on or before November 14, 2016. Rebuttal comments should 
be submitted by November 28, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
Robert W. Errett,
Deputy Secretary.
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    \25\ 17 CFR 200.30-3(a)(57).
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[FR Doc. 2016-25575 Filed 10-21-16; 8:45 am]
 BILLING CODE 8011-01-P