Document ID: SEC-2019-0350-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2019-03-27T04:00Z

[Federal Register Volume 84, Number 59 (Wednesday, March 27, 2019)]
[Notices]
[Pages 11582-11586]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-05807]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85385; File No. SR-NYSEArca-2018-83]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Amendment No. 2 and Order Instituting Proceedings To Determine 
Whether To Approve or Disapprove a Proposed Rule Change, as Modified by 
Amendment No. 2, Regarding Changes to Investments of the iShares 
Bloomberg Roll Select Commodity Strategy ETF

 March 21, 2019.

I. Introduction

    On December 19, 2018, NYSE Arca, Inc. (``Exchange'' or ``NYSE 
Arca'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change regarding changes to investments of the iShares 
Bloomberg Roll Select Commodity Strategy ETF (``Fund''), shares 
(``Shares'') of which are currently listed and traded on the Exchange 
under NYSE Arca Rule 8.600-E . The proposed rule change was published 
for comment in the Federal Register on December 31, 2018.\3\ On 
February 13, 2019, 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 approve or disapprove the proposed 
rule change.\5\ On March 6, 2019, the Exchange filed Amendment No. 1 to 
the proposed rule change, which replaced and superseded the proposed 
rule change as originally filed.\6\ On March 14, 2019, the Exchange 
filed Amendment No. 2 to the proposed rule change, which replaced and 
superseded the proposed rule change, as modified by Amendment No. 1.\7\ 
The Commission has received no comment letters on the proposal. The 
Commission is publishing this notice and order to solicit comments on 
the proposed rule change, as modified by Amendment No. 2, from 
interested persons and to institute proceedings pursuant to Section 
19(b)(2)(B) of the Act \8\ to determine whether to approve or 
disapprove the proposed rule change, as modified by Amendment No. 2.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 84931 (December 21, 
2018), 83 FR 67741.
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 85117, 84 FR 5124 
(February 20, 2019). The Commission designated March 31, 2019, as 
the date by which the Commission shall approve the proposed rule 
change, disapprove the proposed rule change, or institute 
proceedings to determine whether to approve or disapprove the 
proposed rule change.
    \6\ Amendment No. 1 is available at: https://www.sec.gov/comments/sr-nysearca-2018-83/srnysearca201883-5031694-183050.pdf.
    \7\ In Amendment No. 2, the Exchange: (1) Clarified that Shares 
of the Fund commenced listing and trading on the Exchange on April 
5, 2018 under the generic listing standards under Commentary .01 to 
NYSE Arca Rule 8.600-E; (2) clarified that the Fund is not obligated 
to invest in any futures contracts included in, and does not seek to 
replicate the performance of, the Reference Benchmark (as defined 
below); (3) modified the types of derivative instruments and 
reference assets for such derivative instruments that the Fund may 
invest in; (4) clarified that commodity-linked notes are among the 
Fixed Income Instruments (as defined below) that the Fund may invest 
in; (5) specified that the Fund may invest in ETNs and ETFs (each as 
defined below); (6) represented that the Fund's investments 
currently comply with the generic requirements set forth in 
Commentary .01 to NYSE Arca Rule 8.600-E; (7) added a representation 
that the Fund's holdings in OTC Derivatives (as defined below) will 
satisfy the criteria applicable to holdings in listed derivatives in 
Commentary .01(d)(2) to NYSE Arca Rule 8.600-E on an initial and 
continued listing basis; (8) added a representation that the Adviser 
(as defined below) and its affiliates actively monitor counterparty 
credit risk exposure (including for OTC derivatives) and evaluate 
counterparty credit quality on a continuous basis; and (9) made 
technical and conforming changes. Amendment No. 2 is available at: 
https://www.sec.gov/comments/sr-nysearca-2018-83/srnysearca201883-5152678-183414.pdf.
    \8\ 15 U.S.C. 78s(b)(2)(B).
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II. Summary of the Exchange's Description of the Proposal, as Modified 
by Amendment No. 2 9
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    \9\ For a complete description of the Exchange's proposal, see 
Amendment No. 2, supra note 7.
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    The Exchange proposes certain changes regarding investments of the 
Fund, Shares of which are currently listed and traded on the Exchange 
under NYSE Arca Rule 8.600-E, which governs the listing and trading of 
Managed Fund Shares on the Exchange. Shares of the Fund commenced 
listing and trading on the Exchange on April 5, 2018 under the generic 
listing standards under Commentary .01 to NYSE Arca Rule 8.600-E.
    The Shares are offered by iShares U.S. ETF Trust (``Trust''), which 
is registered with the Commission as an open-end management investment 
company.\10\ The Fund is a series of the Trust.
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    \10\ According to the Exchange, on February 21, 2018, the Trust 
filed with the Commission its registration statement on Form N-1A 
under the Securities Act of 1933 and under the Investment Company 
Act of 1940 (``1940 Act'') relating to the Fund (File Nos. 333-
179904 and 811-22649) (``Registration Statement''). In addition, the 
Exchange states that the Commission has issued an order upon which 
the Trust may rely, granting certain exemptive relief under the 1940 
Act. See Investment Company Act Release No. 29571 (January 24, 2011) 
(File No. 812-13601).
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    BlackRock Fund Advisors (``Adviser'') is the investment adviser for 
the Fund.\11\ BlackRock Investments, LLC is the distributor for the 
Fund's Shares. State Street Bank and Trust Company serves as the 
administrator, custodian and transfer agent for the Fund.
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    \11\ According to the Exchange, the Adviser is not registered as 
a broker-dealer but is affiliated with a broker-dealer, and has 
implemented and will maintain a fire wall with respect to its 
broker-dealer affiliate regarding access to information concerning 
the composition and/or changes to the portfolio. In the event (a) 
the Adviser becomes registered as a broker-dealer or newly 
affiliated with a broker-dealer, or (b) any new adviser or sub-
adviser is a registered broker-dealer or becomes affiliated with a 
broker-dealer, it will implement and maintain a fire wall with 
respect to its relevant personnel or its broker-dealer affiliate 
regarding access to information concerning the composition and/or 
changes to the portfolio, and will be subject to procedures designed 
to prevent the use and dissemination of material non-public 
information regarding such portfolio. The Exchange also represents 
that the Adviser and its related personnel are subject to the 
provisions of Rule 204A-1 under the Investment Advisers Act of 1940 
relating to codes of ethics.
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A. Fund Investments

    According to the Exchange, the Fund's investment objective is to 
seek to provide exposure, on a total return basis, to a diversified 
group of commodities. The Fund is actively managed and seeks to achieve 
its investment objective in part \12\ by, under normal market 
conditions,\13\ investing in listed and over-the-counter (``OTC'') 
total return swaps referencing the Bloomberg Roll Select Commodity 
Index (``Reference Benchmark'').\14\ In connection with investments in 
swaps on the Reference Benchmark, the Fund is expected to establish new 
swaps contracts on an ongoing basis and

[[Page 11583]]

replace expiring contracts.\15\ Swaps subsequently entered into by the 
Fund may have terms that differ from the swaps the Fund previously 
held.\16\ The Fund expects generally to pay a fixed payment rate and 
certain swap related fees to the swap counterparty and receive the 
total return of the Reference Benchmark, including in the event of 
negative performance by the Reference Benchmark, negative return (i.e., 
a payment from the Fund to the swap counterparty). In seeking total 
return, the Fund additionally aims to generate interest income and 
capital appreciation through a cash management strategy consisting 
primarily of cash, cash equivalents,\17\ and fixed income securities 
other than cash equivalents, as described below.
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    \12\ The Fund's investment objective is also achieved by 
investing in cash, cash equivalents, Commodity Investments, Fixed 
Income Securities and Short-Term Fixed Income Securities (each as 
defined or described below).
    \13\ The term ``normal market conditions'' is defined in NYSE 
Arca Rule 8.600-E(c)(5).
    \14\ The Bloomberg Roll Select Commodity Index is a version of 
the Bloomberg Commodity Index that aims to mitigate the effects of 
contango on index performance (as described further below). For each 
commodity, the index rolls into the futures contract showing the 
most backwardation or least contango, selecting from those contracts 
with nine months or fewer until expiration. (Source: Bloomberg)
    \15\ Swaps on the Reference Benchmark are included in 
``Commodity Investments'' as defined below.
    \16\ Although the Fund may hold swaps on the Reference 
Benchmark, or direct investments in, the same futures contracts as 
those included in the Reference Benchmark, the Fund is not obligated 
to invest in any futures contracts included in, and does not seek to 
replicate the performance of, the Reference Benchmark.
    \17\ Cash equivalents are the short-term instruments enumerated 
in Commentary .01(c) to NYSE Arca Rule 8.600-E.
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    The Reference Benchmark is composed of 22 futures contracts across 
20 physical agricultural, livestock, energy, precious metals and 
industrial metals commodities. The Reference Benchmark reflects the 
returns from these commodities and provides broad-based exposure to 
commodities as an asset class by using liquidity and sector caps to 
avoid overconcentration in any single commodity or commodity sector. 
The Reference Benchmark employs a contract roll strategy intended to 
minimize the effects of contango and maximize the effects of 
backwardation.\18\
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    \18\ According to the Exchange, in order to maintain exposure to 
a futures contract on a particular commodity, an investor must sell 
the position in the expiring contract and buy a new position in a 
contract with a later delivery month, which is referred to as 
``rolling.'' If the price for the new futures contract is less than 
the price of the expiring contract, then the market for the 
commodity is said to be in ``backwardation.'' In these markets, roll 
returns are positive, which is referred to as ``positive carry.'' 
The term ``contango'' is used to describe a market in which the 
price for a new futures contract is more than the price of the 
expiring contract. In these markets, roll returns are negative, 
which is referred to as ``negative carry.'' The Reference Benchmark 
seeks to employ a positive carry strategy that emphasizes 
commodities and futures contract months with the greatest degree of 
backwardation and lowest degree of contango, resulting in net gains 
through positive roll returns.
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    The Fund will invest in financial instruments described below that 
provide exposure to commodities and not in the physical commodities 
themselves.
    The Fund (through its Subsidiary (as defined below)) may hold the 
following listed derivative instruments: Futures, options, and swaps on 
commodities (which commodities are from the same sectors as those 
included in the Reference Benchmark), currencies, U.S. and non-U.S. 
equity securities, fixed income securities (as defined in Commentary 
.01(b) to NYSE Arca Rule 8.600-E, but excluding Short-Term Fixed Income 
Securities (as defined below)), interest rates, financial rates, U.S. 
Treasuries, or a basket or index of any of the foregoing (collectively, 
``Listed Derivatives'').\19\ Listed Derivatives will comply with the 
criteria in Commentary .01(d) of NYSE Arca Rule 8.600-E.
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    \19\ Examples of Listed Derivatives the Fund may invest in 
include exchange traded futures contracts similar to those found in 
the Reference Benchmark, exchange traded futures contracts on the 
Reference Benchmark, swaps on commodity futures contracts similar to 
those found in the Reference Benchmark, and futures and options that 
correlate to the investment returns of commodities without investing 
directly in physical commodities.
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    The Fund (through its Subsidiary) may hold the following OTC 
derivative instruments: Forwards, options, and swaps on commodities 
(which commodities are from the same sectors as those included in the 
Reference Benchmark), currencies, U.S. and non-U.S. equity securities, 
fixed income securities (as defined in Commentary .01(b) to Rule 8.600-
E, but excluding Short-Term Fixed Income Securities), interest rates, 
financial rates, or a basket or index of any of the foregoing 
(collectively, ``OTC Derivatives,'' \20\ and together with Listed 
Derivatives, ``Commodity Investments'').\21\
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    \20\ Examples of OTC Derivatives the Fund may invest in include 
swaps on commodity futures contracts similar to those found in the 
Reference Benchmark and options that correlate to the investment 
returns of commodities without investing directly in physical 
commodities.
    \21\ As discussed below under ``Application of Generic Listing 
Requirements,'' the Fund's and the Subsidiary's holdings in OTC 
derivatives will not comply with the criteria in Commentary .01(e) 
of NYSE Arca Rule 8.600-E.
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    The Fund may hold cash, cash equivalents and fixed income 
securities other than cash equivalents, as described further below.
    Specifically, the Fund may invest in Short-Term Fixed Income 
Securities (as defined below) other than cash equivalents on an ongoing 
basis to provide liquidity or for other reasons.\22\ Short-Term Fixed 
Income Securities will have a maturity of no longer than 397 days and 
include only the following: (i) Money market instruments; (ii) 
obligations issued or guaranteed by the U.S. government, its agencies 
or instrumentalities (including government-sponsored enterprises); 
(iii) negotiable certificates of deposit, bankers' acceptances, fixed-
time deposits and other obligations of U.S. and non-U.S. banks 
(including non-U.S. branches) and similar institutions; (iv) commercial 
paper; (v) non-convertible corporate debt securities (e.g., bonds and 
debentures); (vi) repurchase agreements; (vii) short-term U.S. dollar-
denominated obligations of non-U.S. banks (including U.S. branches) 
that, in the opinion of the Adviser, are of comparable quality to 
obligations of U.S. banks that may be purchased by the Fund; and (viii) 
sovereign obligations (collectively, ``Short-Term Fixed Income 
Securities''). Any of these securities may be purchased on a current or 
forward-settled basis.\23\
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    \22\ As discussed below under ``Application of Generic Listing 
Requirements,'' the Fund's investments in Short-Term Fixed Income 
Securities will not comply with the requirements of Commentary 
.01(b)(1)-(4) to NYSE Arca Rule 8.600-E.
    \23\ To the extent that the Fund and the Subsidiary invest in 
cash and Short-Term Fixed Income Securities that are cash 
equivalents (i.e., that have maturities of less than 3 months) as 
specified in Commentary .01(c) to NYSE Arca Rule 8.600-E, such 
investments will comply with Commentary .01(c) and may be held 
without limitation. Non-convertible corporate debt securities and 
sovereign obligations are not included as cash equivalents in 
Commentary .01(c).
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    The Fund also may invest in fixed income securities as defined in 
Commentary .01(b) to NYSE Arca Rule 8.600-E,\24\ other than cash 
equivalents and Short-Term Fixed Income Securities, with remaining 
maturities longer than 397 days (``Fixed Income Securities''). Such 
Fixed Income Securities will comply with the requirements of Commentary 
.01(b) to NYSE Arca Rule 8.600-E.\25\
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    \24\ Commentary .01(b) to NYSE Arca Rule 8.600-E defines fixed 
income securities as debt securities that are notes, bonds, 
debentures or evidence of indebtedness that include, but are not 
limited to, U.S. Department of Treasury securities (``Treasury 
Securities''), government-sponsored entity securities (``GSEs''), 
municipal securities, trust preferred securities, supranational debt 
and debt of a foreign country or a subdivision thereof, investment 
grade and high yield corporate debt, bank loans, mortgage and asset 
backed securities, and commercial paper.
    \25\ Among the Fixed Income Securities in which the Fund may 
invest are commodity-linked notes.
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    The Fund may also hold exchange-traded notes (``ETNs'') \26\ and 
exchange-traded funds (``ETFs'').\27\
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    \26\ ETNs are securities as described in NYSE Arca Rule 5.2-
E(j)(6) (Equity Index-Linked Securities, Commodity-Linked 
Securities, Currency-Linked Securities, Fixed Income Index-Linked 
Securities, Futures-Linked Securities and Multifactor Index-Linked 
Securities).
    \27\ The term ``ETFs'' includes Investment Company Units (as 
described in NYSE Arca Rule 5.2-E(j)(3)); Portfolio Depositary 
Receipts (as described in NYSE Arca Rule 8.100-E); and Managed Fund 
Shares (as described in NYSE Arca Rule 8.600-E). All ETFs will be 
listed and traded in the U.S. on a national securities exchange. The 
Fund will not invest in inverse or leveraged (e.g., 2X, -2X, 3X or -
3X) ETFs.

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[[Page 11584]]

    The Fund's exposure to Commodity Investments is obtained by 
investing through a wholly-owned subsidiary organized in the Cayman 
Islands (``Subsidiary'').\28\ The Fund controls the Subsidiary, and the 
Subsidiary is advised by the Adviser and has the same investment 
objective as the Fund. In compliance with the requirements of Sub-
Chapter M of the Internal Revenue Code of 1986, the Fund may invest up 
to 25% of its total assets in the Subsidiary. The Subsidiary is not an 
investment company registered under the 1940 Act and is a company 
organized under the laws of the Cayman Islands. The Trust's Board of 
Trustees (``Board'') has oversight responsibility for the investment 
activities of the Fund, including its investment in the Subsidiary, and 
the Fund's role as sole shareholder of the Subsidiary.
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    \28\ The Exchange represents that all statements related to the 
Fund's investments and restrictions are applicable to the Fund and 
Subsidiary collectively.
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    The Fund's Commodity Investments held in the Subsidiary are 
intended to provide the Fund with exposure to broad commodities. The 
Subsidiary may hold cash and cash equivalents.

B. Investment Restrictions

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

C. Use of Derivatives by the Fund

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

D. Application of Generic Listing Requirements

    The Exchange represents that the proposed portfolio for the Fund 
will not meet all of the ``generic'' listing requirements of Commentary 
.01 to NYSE Arca Rule 8.600-E applicable to the listing of Managed Fund 
Shares. The Exchange represents that the Fund's portfolio will meet all 
such requirements except for those set forth in Commentary .01 (b)(1)-
(4) (with respect to Short-Term Fixed Income Securities) and .01(e) 
(with respect to OTC Derivatives), as described below.
    According to the Exchange, the Fund's investments currently comply 
with the generic requirements set forth in Commentary .01 to NYSE Arca 
Rule 8.600-E. The Exchange proposes that, going forward, the Fund's 
investments in Short-Term Fixed Income Securities will not comply with 
the requirements set forth in Commentary .01(b)(1)-(4) to NYSE Arca 
Rule 8.600-E.\29\ The Exchange states that while the requirements set 
forth in Commentary .01(b)(1)-(4) include rules intended to ensure that 
the fixed income securities included in a fund's portfolio are 
sufficiently large and diverse and have sufficient publicly available 
information regarding the issuances, the Exchange believes that any 
concerns regarding non-compliance are mitigated by the types of 
instruments that the Fund would hold. The Exchange represents that the 
Fund's Short-Term Fixed Income Securities primarily would include those 
instruments that are included in the definition of cash and cash 
equivalents,\30\ but are not considered cash and cash equivalents 
because they have maturities of three months or longer. The Exchange 
believes, however, that, because all Short-Term Fixed Income 
Securities, including non-convertible corporate debt securities and 
sovereign obligations (which are not cash equivalents as enumerated in 
Commentary .01(c) to NYSE Arca Rule 8.600-E), are highly liquid they 
are less susceptible than other types of fixed income instruments both 
to price manipulation and volatility and that the holdings as proposed 
are generally consistent with the policy concerns which Commentary 
.01(b)(1)-(4) is intended to address. Because the Short-Term Fixed 
Income Securities will consist of high-quality fixed income securities 
described above, the Exchange believes that the policy concerns that 
Commentary .01(b)(1)-(4) is intended to address are otherwise mitigated 
and that the Fund should be permitted to hold these securities in a 
manner that may not comply with Commentary .01(b)(1)-(4).
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    \29\ Commentary .01(b)(1)-(4) to NYSE Arca Rule 8.600-E requires 
that the components of the fixed income portion of a portfolio meet 
the following criteria initially and on a continuing basis: (1) 
Components that in the aggregate account for at least 75% of the 
fixed income weight of the portfolio each shall have a minimum 
original principal amount outstanding of $100 million or more; (2) 
no component fixed-income security (excluding Treasury Securities 
and GSE Securities) shall represent more than 30% of the fixed 
income weight of the portfolio, and the five most heavily weighted 
component fixed income securities in the portfolio (excluding 
Treasury Securities and GSE Securities) shall not in the aggregate 
account for more than 65% of the fixed income weight of the 
portfolio; (3) an underlying portfolio (excluding exempted 
securities) that includes fixed income securities shall include a 
minimum of 13 non-affiliated issuers, provided, however, that there 
shall be no minimum number of non-affiliated issuers required for 
fixed income securities if at least 70% of the weight of the 
portfolio consists of equity securities as described in Commentary 
.01(a); and (4) component securities that in aggregate account for 
at least 90% of the fixed income weight of the portfolio must be 
either (a) from issuers that are required to file reports pursuant 
to Sections 13 and 15(d) of the Securities Exchange Act of 1934; (b) 
from issuers that have a worldwide market value of its outstanding 
common equity held by non-affiliates of $700 million or more; (c) 
from issuers that have outstanding securities that are notes, bonds 
debentures, or evidence of indebtedness having a total remaining 
principal amount of at least $1 billion; (d) exempted securities as 
defined in Section 3(a)(12) of the Securities Exchange Act of 1934; 
or (e) from issuers that are a government of a foreign country or a 
political subdivision of a foreign country.
    \30\ See supra note 17.
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    According to the Exchange, the Fund's portfolio with respect to OTC 
Derivatives currently complies with the requirements set forth in 
Commentary

[[Page 11585]]

.01(e) to NYSE Arca Rule 8.600-E.\31\ The Exchange proposes that, going 
forward, the Fund's holdings in OTC Derivatives will not comply with 
the requirements set forth in Commentary .01(e). Specifically, the 
Exchange states that up to 60% of the Fund's assets (calculated as the 
aggregate gross notional value) may be invested in OTC Derivatives. The 
Exchange states that the Adviser believes that it is important to 
provide the Fund with additional flexibility to manage risk associated 
with its investments and, depending on market conditions, it may be 
critical that the Fund be able to utilize available OTC Derivatives to 
efficiently gain exposure to the multiple commodities that underlie the 
Reference Benchmark, as well as commodity futures contracts similar to 
those found in the Reference Benchmark.
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    \31\ Commentary .01(e) to NYSE Arca Rule 8.600-E provides that, 
on an initial and continuing basis, no more than 20% of the assets 
in the portfolio may be invested in OTC derivatives (calculated as 
the aggregate gross notional value of the OTC derivatives).
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    The Exchange states that OTC Derivatives can be tailored to provide 
specific exposure to the Fund's Reference Benchmark, as well as 
commodity futures contracts similar to those found in the Reference 
Benchmark, allowing the Fund to more efficiently meet its investment 
objective.\32\ The Exchange further states that if the Fund were to 
gain commodity exposure exclusively through the use of listed futures, 
the Fund's holdings in listed futures would be subject to position 
limits and accountability levels established by an exchange, and such 
limitations would restrict the Fund's ability to gain efficient 
exposure to the commodities in the Reference Benchmark, or futures 
contracts similar to those found in the Reference Benchmark, thereby 
impeding the Fund's ability to satisfy its investment objective.
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    \32\ As an example, the Exchange states that the Reference 
Benchmark is composed of 22 futures contracts across 20 physical 
commodities, which may not be sufficiently liquid and would not 
provide the commodity exposure the Fund requires to meet its 
investment objective if the Fund were to invest in the futures 
directly. The Exchange states that a total return swap can be 
structured to provide exposure to the same futures contracts as 
exist in the Reference Benchmark, as well as commodity futures 
contracts similar to those found in the Reference Benchmark, while 
providing sufficient efficiency to allow the Fund to more easily 
meet its investment objective.
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    The Exchange states that the Adviser represents that the Fund's 
holdings in OTC Derivatives will satisfy the criteria applicable to 
holdings in Listed Derivatives in Commentary .01(d)(2) to NYSE Arca 
Rule 8.600-E on an initial and continued listing basis.\33\ Thus, with 
respect to the Fund's holdings in OTC Derivatives, the aggregate gross 
notional value of OTC Derivatives based on any five or fewer underlying 
reference assets will not exceed 65% of the weight of the portfolio 
(including gross notional exposures), and the aggregate gross notional 
value of OTC Derivatives based on any single underlying reference asset 
will not exceed 30% of the weight of the portfolio (including gross 
notional exposures). The Exchange also represents that the Adviser and 
its affiliates actively monitor counterparty credit risk exposure 
(including for OTC derivatives) and evaluate counterparty credit 
quality on a continuous basis. Finally, the Exchange states that the 
Adviser represents that futures contracts on all commodities in the 
Reference Benchmark are traded on futures exchanges that are members of 
the Intermarket Surveillance Group.
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    \33\ Commentary .01(d)(2) to NYSE Arca Rule 8.600-E provides 
that, with respect to a fund's portfolio, the aggregate gross 
notional value of listed derivatives based on any five or fewer 
underlying reference assets shall not exceed 65% of the weight of 
the portfolio (including gross notional exposures), and the 
aggregate gross notional value of listed derivatives based on any 
single underlying reference asset shall not exceed 30% of the weight 
of the portfolio (including gross notional exposures).
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III. Proceedings To Determine Whether To Approve or Disapprove SR-
NYSEArca-2018-83, as Modified by Amendment No. 2, and Grounds for 
Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \34\ 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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    \34\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\35\ 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.'' \36\
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    \35\ Id.
    \36\ 15 U.S.C. 78f(b)(5).
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IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposed rule 
change, as modified by Amendment No. 2, is consistent with Section 
6(b)(5) or any other provision of the Act, or the rules and regulations 
thereunder. Although there do not appear to be any issues relevant to 
approval or disapproval that would be facilitated by an oral 
presentation of views, data, and arguments, the Commission will 
consider, pursuant to Rule 19b-4 under the Act,\37\ any request for an 
opportunity to make an oral presentation.\38\
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    \37\ 17 CFR 240.19b-4.
    \38\ Section 19(b)(2) of the Act, as amended by the Securities 
Acts Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Acts Amendments of 1975, Senate Comm. 
on Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposed rule change, as modified by 
Amendment No. 2, should be approved or disapproved by April 17, 2019. 
Any person who wishes to file a rebuttal to any other person's 
submission must file that rebuttal by May 1, 2019. The Commission asks 
that commenters address the sufficiency of the Exchange's statements in 
support of the proposal, which are set forth in Amendment No. 2,\39\ in 
addition to any other comments they may wish to submit about the 
proposed rule change.
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    \39\ See supra note 7.
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    In this regard, the Commission seeks comment on the Exchange's 
statements that the Fund will not comply with the requirement in 
Commentary .01(e) to NYSE Arca Rule 8.600-E that investments in OTC 
Derivatives be limited to 20% of the assets of the Fund's portfolio. 
Instead, the Fund's investments in OTC Derivatives would

[[Page 11586]]

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NYSEArca-2018-83 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NYSEArca-2018-83. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NYSEArca-2018-83 and should be submitted 
by April 17, 2019. Rebuttal comments should be submitted by May 1, 
2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\41\
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    \41\ 17 CFR 200.30-3(a)(12); 17 CFR 200.30-3(a)(57).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-05807 Filed 3-26-19; 8:45 am]
BILLING CODE 8011-01-P