82 FR 24171 - Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Amend BZX Rule 14.11, Other Securities, To Provide for the Inclusion of Cash in an Index Underlying a Series of Index Fund Shares

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 82, Issue 100 (May 25, 2017)

[Federal Register Volume 82, Number 100 (Thursday, May 25, 2017)]
[Notices]
[Pages 24171-24173]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2017-10686]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80728; File No. SR-BatsBZX-2017-26]


Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change To Amend BZX Rule 14.11, Other 
Securities, To Provide for the Inclusion of Cash in an Index Underlying 
a Series of Index Fund Shares

May 19, 2017.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on May 12, 2017, Bats BZX Exchange, Inc. (the ``Exchange'' or 
``BZX'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange filed a proposal to amend BZX Rule 14.11, Other 
Securities, to provide for the inclusion of cash in an index underlying 
a series of Index Fund Shares.
    The text of the proposed rule change is available at the Exchange's 
Web site at www.bats.com, at the principal office of the Exchange, and 
at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant parts of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend BZX Rule 14.11(c), Index Fund 
Shares, to provide for the inclusion of cash in an index underlying a 
series of Index Fund Shares (``Shares'').\3\ More specifically, BZX 
Rules 14.11(c)(3) and 14.11(c)(4) provide ``generic'' criteria 
permitting listing and trading of Shares pursuant to Rule 19b-4(e) 
under the Act \4\ when the underlying index or portfolio satisfies the 
criteria set forth in BZX Rules 14.11(c)(3) related to equity 
securities or 14.11(c)(4) related to fixed income securities.
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    \3\ Index Fund Shares are securities issued by an open-end 
management investment company based on a portfolio of stocks or 
fixed income securities or a combination thereof, that seeks to 
provide investment results that correspond generally to the price 
and yield performance or total return performance of a specified 
foreign or domestic stock index, fixed income securities index or 
combination thereof.
    \4\ 17 CFR 240.19b-4(e).
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    The Exchange understands that certain index providers have 
included, or intend to include, cash as a component in indexes that 
also include equity or fixed income securities components. An index 
provider may, for example, provide a certain index weighting allocation 
to cash or may periodically change an allocation to cash based on the 
index provider's assessment of market risk associated with other asset 
classes in the applicable index. Accordingly, the Exchange proposes to 
amend BZX Rules 14.11(c)(3) and 14.11(c)(4) to explicitly permit 
listing and trading of Shares based on an index or portfolio that 
includes cash as a component.
    BZX Rule 14.11(c)(3)(A)(i) currently provides that the component 
stocks of an index or portfolio of U.S. Component Stocks \5\ underlying 
a series of Shares must meet certain requirements related to the market 
cap, trading volume, weighting, diversity, and security requirements. 
BZX Rule 14.11(c)(3)(A)(ii) currently provides that the components of 
an index or portfolio underlying a series of Shares that consist of 
either only Non-U.S. Component Stocks \6\ or both U.S. Component Stocks 
and Non-U.S. Component Stocks must meet certain similar requirements 
related to the market cap, trading volume, weighting, diversity, and 
security requirements that are either equally or more restrictive than 
for an index or portfolio of U.S. Component Stocks. Finally, BZX Rule 
14.11(c)(4)(B)(i) provides that each component of an index or portfolio 
that underlies a series of Shares shall meet the following criteria: 
The index or portfolio must consist of Fixed Income Securities \7\ as 
well as certain requirements related to original principal outstanding, 
convertible securities, weighting, diversity, and certain issuer 
requirements. As described below, the proposed amendments to BZX Rule 
14.11(c)(3) and 14.11(c)(4) would make clear that cash is permitted to 
be held as an index or portfolio component and how such

[[Page 24172]]

cash component should be treated for calculation purposes.
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    \5\ Pursuant to BZX Rule 14.11(c)(1)(D), the term ``U.S. 
Component Stock'' shall mean an equity security that is registered 
under Sections 12(b) or 12(g) of the Act, or an American Depositary 
Receipt, the underlying equity security of which is registered under 
Sections 12(b) or 12(g) of the Act.
    \6\ Pursuant to BZX Rule 14.11(c)(1)(E), the term ``Non-U.S. 
Component Stock'' shall mean an equity security that (a) is not 
registered under Sections 12(b) or 12(g) of the Act, (b) is issued 
by an entity that is not organized, domiciled or incorporated in the 
United States, and (c) is issued by an entity that is an operating 
company (including Real Estate Investment Trusts (REITs) and income 
trust, but excluding investment trusts, unit trusts, mutual funds, 
and derivatives).
    \7\ Pursuant to BZX Rule 14.11(c)(4), Fixed Income Securities 
are 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 (``GSE Securities''), municipal 
securities, trust preferred securities, supranational debt and debt 
of a foreign country or a subdivision thereof.
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    The Exchange proposes to amend BZX Rule 14.11(c)(3)(A)(i) to make 
clear that the components of an index or portfolio underlying a series 
of Shares may also include cash. In addition, the percentage weighting 
criteria in BZX Rule 14.11(c)(3)(A)(i)(a) through (d) each would be 
amended to make clear that such criteria would be applied only to the 
U.S. Component Stocks portion of an index or portfolio. For example, in 
applying the criteria in proposed BZX Rule 14.11(c)(3)(A)(i)(a),\8\ if 
85% of the weight of an index consists of U.S. Component Stocks and 15% 
of the index weight is cash, the requirement that component stocks 
accounting for 90% of the weight of the index or portfolio have a 
minimum market value of $75 million minimum would be applied only to 
the 85% portion consisting of U.S. Component Stocks.
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    \8\ Proposed changes to BZX Rule 14.11(c)(3)(A)(i)(a) would 
provide that component stocks (excluding Derivative Securities 
Products) that in the aggregate account for at least 90% of the 
weight of the U.S. Component Stocks portion of the index or 
portfolio (excluding such Derivative Securities Products) each shall 
have a minimum market value of at least $75 million.
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    The Exchange proposes to amend BZX Rule 14.11(c)(3)(A)(ii), which 
relates to international or global indexes or portfolios, in order to 
make clear that components of an index or portfolio underlying a series 
of Shares may consist of (a) only Non-U.S. Component Stocks, (b) Non-
U.S. Component Stocks and cash, (c) both U.S. Component Stocks and Non-
U.S. Component Stocks, or (d) U.S. Component Stocks, Non-U.S. Component 
Stocks and cash. In addition, the percentage weighting criteria in BZX 
Rule 14.11(c)(3)(A)(ii)(a) thought (d) each would be amended to make 
clear that such criteria would be applied only to the U.S. and Non-U.S. 
Component Stocks portions of an index or portfolio.
    As noted above, BZX Rule 14.11(c)(4) provides generic criteria 
applicable to listing and trading of Shares whose underlying index or 
portfolio includes Fixed Income Securities. The Exchange proposes to 
amend BZX Rule 14.11(c)(4)(B)(i)(a) to make clear that the index or 
portfolio may also include cash. In addition, the percentage weighting 
criteria in BZX Rule 14.11(c)(4)(B)(i)(b), BZX Rule 
14.11(c)(4)(B)(i)(d), and BZX Rule 14.11(c)(4)(B)(i)(f) each would be 
amended to make clear that such criteria would be applied only to the 
Fixed Income Securities portion of an index or portfolio. For example, 
in applying the criteria in proposed Rule 14.11(i)(4)(B)(i)(b),\9\ if 
90% of the weight of an index or portfolio consists of Fixed Income 
Securities and 10% of the index weight is cash, the requirement that 
Fixed Income Securities accounting for at least 75% of the weight of 
the index or portfolio have a minimum original principal amount 
outstanding of $100 million would be applied only to the 90% portion of 
the index or portfolio that consists of Fixed Income Securities.
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    \9\ Proposed 14.11(c)(4)(B)(i)(b) would provide that Fixed 
Income Security components that in aggregate account for at least 
75% of the Fixed Income Securities portion of the weight of the 
index or portfolio each shall have a minimum original principal 
amount outstanding of $100 million or more.
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    The Exchange notes that the Commission has previously approved 
Exchange rules allowing portfolios held by issues of Managed Fund 
Shares (actively-managed exchange-traded funds) under BZX Rule 
14.11(i)(4)(C) to include cash.\10\ Like the provision in BZX Rule 
14.11(i)(4)(C)(iii), which states that there is no limit to cash 
holdings by an issue of Managed Fund Shares listed under BZX Rule 
14.11(i)(4)(C), there is no proposed limit to the weighting of cash in 
an index underlying a series of Shares. The Exchange believes this is 
appropriate in that cash does not, in itself, impose investment or 
market risk.
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    \10\ See BZX Rule 14.11(i)(4)(C)(iii).
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    The Exchange believes the proposed amendments, by permitting 
inclusion of cash as a component of indexes underlying series of 
Shares, would provide issuers of Shares with additional choice in 
indexes permitted to underlie Shares that are permitted to list and 
trade on the Exchange pursuant to the Rule 19b-4(e), which would 
enhance competition among market participants, to the benefit of 
investors and the marketplace. In addition, the proposed amendments 
would provide investors with greater ability to hold Shares based on 
underlying indexes that may accord more closely with an investor's 
assessment of market risk, in that some investors may view cash as a 
desirable component of an underlying index under certain market 
conditions.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\11\ in general, and furthers the 
objectives of Sections 6(b)(5) of the Act,\12\ in particular, because 
it is designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to, and 
perfect the mechanisms of, a free and open market and a national market 
system and, in general, to protect investors and the public interest 
and because it is not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
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    The Exchange has in place surveillance procedures that are adequate 
to properly monitor trading in Shares in all trading sessions and to 
deter and detect violations of Exchange rules and applicable federal 
securities laws.
    The Exchange notes that, as described above, the percentage 
weighting criteria in BZX Rule 14.11(c)(3)(A)(i)(a) through (d) (U.S. 
index or portfolio) each would be amended to make clear that such 
criteria would apply only to the U.S. Component Stocks portion of an 
index or portfolio; BZX Rule 14.11(c)(3)(A)(ii)(a) through (d) 
(international or global index or portfolio) each would be amended to 
make clear that such criteria would be applied only to the U.S. and 
Non-U.S. Component Stocks portions of an index or portfolio; and the 
percentage weighting criteria in BZX Rule 14.11(c)(4)(B)(i)(b), (d), 
and (f) (fixed income index or portfolio) each would be amended to make 
clear that such criteria would be applied only to the Fixed Income 
Securities portion of an index or portfolio. Such applications of the 
proposed amendments would assure that the weighting requirements in 
Rules 14.11(c)(3) and 14.11(c)(4) would continue to be applied only to 
securities in an index or portfolio, and would not be diluted as a 
result of inclusion of a cash component. In addition, the addition of 
cash as a permitted component of indexes underlying Shares listed and 
traded on the Exchange pursuant to Rule 19b-4(e) does not raise 
regulatory issues because cash does not, in itself, impose investment 
or market risk and is not susceptible to manipulation.
    The Exchange believes the proposed amendments, by explicitly 
permitting inclusion of cash as a component of indexes underlying 
series of Shares, would provide issuers of Shares with additional 
choice in indexes permitted to underlie Shares that are permitted to 
list and trade on the Exchange pursuant to the Rule 19b-4(e), which 
would enhance competition among market participants, to the benefit of 
investors and the marketplace. In addition, the proposed amendments 
would provide

[[Page 24173]]

investors with greater ability to hold Shares based on underlying 
indexes that may accord more closely with an investor's assessment of 
market risk.

B. Self-Regulatory Organization's Statement on Burden on Competition

    In accordance with Section 6(b)(8) of the Act,\13\ the Exchange 
believes that the proposed rule change would not impose any burden on 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act. The proposed rule change would explicitly permit 
Exchange listing and trading under Rule 19b-4(e) of Shares based on 
indexes that include cash as a component, which would enhance 
competition among market participants, to the benefit of investors and 
the marketplace.
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    \13\ 15 U.S.C. 78f(b)(8).
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will: 
(a) By order approve or disapprove such proposed rule change; or (b) 
institute proceedings to determine whether the proposed rule change 
should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change 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 [email protected]. Please include 
File Number SR-BatsBZX-2017-26 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-BatsBZX-2017-26. 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 such 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-BatsBZX-2017-26, and should 
be submitted on or before June 15, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-10686 Filed 5-24-17; 8:45 am]
BILLING CODE 8011-01-P