83 FR 929 - Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing of a Proposed Rule Change To List and Trade Shares of the First Trust Bitcoin Strategy ETF and the First Trust Inverse Bitcoin Strategy ETF, Each a Series of the First Trust Exchange-Traded Fund VII, Under Rule 14.11(i), Managed Fund Shares
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 83, Issue 5 (January 8, 2018)
Federal Register Volume 83, Issue 5 (January 8, 2018)
| Page Range | 929-936 | |
| FR Document | 2018-00077 |
[Federal Register Volume 83, Number 5 (Monday, January 8, 2018)] [Notices] [Pages 929-936] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2018-00077] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-82429; File No. SR-CboeBZX-2017-021] Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing of a Proposed Rule Change To List and Trade Shares of the First Trust Bitcoin Strategy ETF and the First Trust Inverse Bitcoin Strategy ETF, Each a Series of the First Trust Exchange-Traded Fund VII, Under Rule 14.11(i), Managed Fund Shares January 2, 2018. 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 December 19, 2017, Cboe 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. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b-4. --------------------------------------------------------------------------- I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The Exchange filed a proposal to list and trade shares of the First Trust Bitcoin Strategy ETF and the First Trust Inverse Bitcoin Strategy ETF (each a ``Fund'' and, collectively, the ``Funds''), each a series of the First Trust Exchange-Traded Fund VII (the ``Trust''), under Rule 14.11(i) (``Managed Fund Shares''). The shares of the Funds are referred to herein as the ``Shares.'' The text of the proposed rule change is available at the Exchange's website at www.markets.cboe.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 list and trade shares of the First Trust Bitcoin Strategy ETF (the ``Long Bitcoin Fund'') and the First Trust Inverse Bitcoin Strategy ETF (the ``Inverse Bitcoin Fund'') under Rule 14.11(i), which governs the listing and trading of Managed Fund Shares on the Exchange.\3\ --------------------------------------------------------------------------- \3\ The Commission originally approved BZX Rule 14.11(i) in Securities Exchange Act Release No. 65225 (August 30, 2011), 76 FR 55148 (September 6, 2011) (SR-BATS-2011-018) and subsequently approved generic listing standards for Managed Fund Shares under Rule 14.11(i) in Securities Exchange Act Release No. 78396 (July 22, 2016), 81 FR 49698 (July 28, 2016) (SR-BATS-2015-100). --------------------------------------------------------------------------- The Shares will be offered by the Trust, which was organized as a Massachusetts business trust on November 6, 2012. The Trust is registered with the Commission as an open-end investment company and has filed a registration statement on behalf of the Funds on Form N-1A (``Registration Statement'') with the Commission.\4\ The Adviser, as defined below, is also registered as a Commodity Pool Operator. --------------------------------------------------------------------------- \4\ See Registration Statement on Form N-1A for the Trust, dated December 11, 2017 (File Nos. 333-184918 and 811-22767). The descriptions of the Funds and the Shares contained herein are based, in part, on information in the Registration Statement. The Commission has issued an order, upon which the Trust may rely, granting certain exemptive relief under the Investment Company Act of 1940 (15 U.S.C. 80a-1) (``1940 Act'') (the ``Exemptive Order''). See Investment Company Act Release No. 30029, April 10, 2012 (File No. 812-13795). In addition, on December 6, 2012, the staff of the Commission's Division of Investment Management (``Division'') issued a no-action letter (``No-Action Letter'') relating to the use of derivatives by actively-managed exchange-traded funds (``ETFs''). See No-Action Letter dated December 6, 2012 from Elizabeth G. Osterman, Associate Director, Office of Exemptive Applications, Division of Investment Management. The No-Action Letter stated that the Division would not recommend enforcement action to the Commission under applicable provisions of and rules under the 1940 Act if ETFs operating in reliance on specified orders (which include the Exemptive Order) invest in options contracts, futures contracts, or swap agreements provided that they comply with certain representations stated in the No-Action Letter. --------------------------------------------------------------------------- First Trust Advisors L.P. is the investment adviser (the ``Adviser'') to the Funds and a commodity pool operator (``CPO''). The Funds will be operated in accordance with applicable Commodity Futures Trading Commission (``CFTC'') rules, as well as the regulatory scheme applicable to registered investment companies. Registration as a CPO imposes additional compliance obligations on the Adviser and the Funds related to additional laws, regulations, and enforcement policies. Rule 14.11(i)(7) provides that, if the investment adviser to the investment company issuing Managed Fund Shares is affiliated with a broker-dealer, such investment adviser shall erect a ``fire wall'' between the investment adviser and the broker-dealer with respect to access to information concerning the composition and/or changes to such investment company portfolio.\5\ In [[Page 930]] addition, Rule 14.11(i)(7) further requires that personnel who make decisions on the investment company's portfolio composition must be subject to procedures designed to prevent the use and dissemination of material nonpublic information regarding the applicable investment company portfolio. Rule 14.11(i)(7) is similar to Rule 14.11(b)(5)(A)(i), however, Rule 14.11(i)(7) in connection with the establishment of a ``fire wall'' between the investment adviser and the broker-dealer reflects the applicable open-end fund's portfolio, not an underlying benchmark index, as is the case with index-based funds. The Adviser is not a registered broker-dealer, but is currently affiliated with a broker-dealer and, in the future may be affiliated with other broker-dealers. The Adviser 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 each Fund's portfolio. The Adviser personnel who make decisions regarding each Fund's portfolio are subject to procedures designed to prevent the use and dissemination of material nonpublic information regarding each Fund's portfolio. In the event that (a) the Adviser becomes a broker- dealer or newly affiliated with a broker-dealer, or (b) any new adviser or sub-adviser is a broker-dealer or becomes affiliated with a broker- dealer, it will implement a fire wall with respect to its relevant personnel or such broker-dealer affiliate, as applicable, 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. --------------------------------------------------------------------------- \5\ An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940, as amended (the ``Advisers Act''). As a result, the Adviser and its related personnel are subject to the provisions of Rule 204A-1 under the Advisers Act relating to codes of ethics. This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws. Accordingly, procedures designed to prevent the communication and misuse of non- public information by an investment adviser must be consistent with Rule 204A-1 under the Advisers Act. In addition, Rule 206(4)-7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation, by the investment adviser and its supervised persons, of the Advisers Act and the Commission rules adopted thereunder; (ii) implemented, at a minimum, an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation; and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above. --------------------------------------------------------------------------- Bitcoin Futures Contracts Prior to listing a new commodity futures contract, a designated contract market must either submit a self-certification to the CFTC that the contract complies with the Commodity Exchange Act (``CEA'') and CFTC regulations or voluntarily submit the contract for CFTC approval. This process applies to all futures contracts and all commodities underlying the futures contracts, whether the new futures contracts are related to oil, gold, or any other commodity.\6\ On December 1, 2017, it was announced that both Cboe Futures Exchange, Inc. (``CFE'') and Chicago Mercantile Exchange, Inc. (``CME'') had self-certified with the CFTC new contracts for bitcoin \7\ futures products.\8\ While the CFE bitcoin futures contracts (``XBT Futures'') \9\ and the CME bitcoin futures contracts (``CME Futures'') \10\ will differ in certain of their implementation details, both contracts will generally trade and settle like any other cash-settled commodity futures contracts.\11\ --------------------------------------------------------------------------- \6\ Section 1a(9) of the CEA defines commodity to include, among other things, ``all services, rights, and interests in which contracts for future delivery are presently or in the future dealt in.'' The definition of commodity is broad. 7 U.S.C. 1a(9). \7\ Bitcoin is a digital asset based on the decentralized, open source protocol of the peer-to-peer bitcoin computer network (the ``Bitcoin Network''). No single entity owns or operates the Bitcoin Network; the infrastructure is collectively maintained by a decentralized user base. The Bitcoin Network is accessed through software, and software governs bitcoin's creation, movement, and ownership. The value of bitcoin is determined by the supply of and demand for bitcoin on websites that facilitate the transfer of bitcoin in exchange for government-issued currencies, and in private end-user-to-end-user transactions. \8\ Bitcoin is a commodity as defined in Section 1a(9) of the CEA. 7 U.S.C. 1a(9). See In re Coinflip, Inc., No. 15-29 (CFTC Sept. 17, 2015), available at: http://www.cftc.gov/ucm/groups/public/@lrenforcementactions/documents/legalpleading/enfcoinfliprorder09172015.pdf. \9\ The XBT Futures are cash-settled futures contracts based on the auction price of bitcoin in U.S. dollars on the Gemini Exchange that will expire on a weekly, monthly and quarterly basis. XBT Futures are designed to reflect economic exposure related to the price of bitcoin. XBT Futures began trading on December 10, 2017. \10\ The CME Futures are also cash-settled futures contracts based on the CME CF Bitcoin Reference Rate, which is based on an aggregation of trade flow from several bitcoin spot exchanges, that will expire on a monthly and quarterly basis. CME Futures began trading on December 17, 2017. \11\ Bitcoin Futures Contracts (as defined herein) are measures of the market's expectation of the price of bitcoin at certain points in the future, and as such will behave differently than current or spot bitcoin prices. The Funds are not linked to bitcoin and in many cases the Funds could significantly underperform or outperform the price of bitcoin. --------------------------------------------------------------------------- The Exchange proposes to list the Funds pursuant to Rule 14.11(i), however there are two ways in which the Funds will not necessarily meet the listing standards included in that Rule. As such, the Exchange submits this proposal in order to allow each Fund to hold: (i) Listed derivatives in a manner that does not comply with Rule 14.11(i)(4)(C)(iv)(b); \12\ and (ii) Non-U.S. Component Stocks \13\ in a manner that may not comply with Rule 14.11(i)(4)(C)(i)(b)(3) \14\ and (4).\15\ Otherwise, the Funds will comply with all other listing requirements of the Generic Listing Standards \16\ for Managed Fund Shares on an initial and continued listing basis under Rule 14.11(i). --------------------------------------------------------------------------- \12\ Rule 14.11(i)(4)(C)(iv)(b) 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).'' The Exchange is proposing that the Funds be exempt from the requirement of Rule 14.11(i)(4)(C)(iv)(b) that prevents the aggregate gross notional value of listed derivatives based on any single underlying reference asset from exceeding 30% of the weight of the portfolio (including gross notional exposures) and the requirement 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). \13\ The term ``Non-U.S. Component Stock'' means 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 trusts, but excluding investment trusts, unit trusts, mutual funds, and derivatives). \14\ Rule 14.11(i)(4)(C)(i)(b)(3) provides that ``the most heavily weighted Non-U.S. Component stock shall not exceed 25% of the equity weight of the portfolio, and, to the extent applicable, the five most heavily weighted Non-U.S. Component Stocks shall not exceed 60% of the equity weight of the portfolio.'' As proposed, each Fund may hold as few as one Non-U.S. Component Stock, meaning that the Non-U.S. Component Stock could constitute 100% of the equity weight of the portfolio. As noted below, however, neither Fund will hold more than 25% of the weight of the portfolio in Non- U.S. Component Stocks. \15\ Rule 14.11(i)(4)(C)(i)(b)(4) provides that ``where the equity portion of the portfolio includes Non-U.S. Component Stocks, the equity portion of the portfolio shall include a minimum of 20 total component stocks; provided, however, that there shall be no minimum number of component stocks if (a) one or more series of Derivative Securities Products or Linked Securities constitute, at least in part, components underlying a series of Managed Fund Shares, or (b) one or more series of Derivative Securities Products or Linked Securities account for 100% of the equity weight of the portfolio of a series of Managed Fund Shares.'' While the Funds, as proposed, would be permitted to hold Derivative Securities Products or Linked Securities (both of which are ETPs, as defined below), they won't necessarily hold such instruments and may hold fewer than 20 Non-U.S. Component Stocks, which would not comply with this Rule. \16\ For purposes of this proposal, the term ``Generic Listing Standards'' shall mean the generic listing rules for Managed Fund Shares under Rule 14.11(i)(4)(C). --------------------------------------------------------------------------- First Trust Bitcoin Strategy ETF According to the Registration Statement, the Long Bitcoin Fund is an actively managed fund that seeks to provide investors with long exposure to the price movements of bitcoin instruments. Under Normal Market Conditions,\17\ the Long Bitcoin Fund [[Page 931]] seeks to achieve its investment objective by investing in a portfolio of financial instruments that provide exposure to movements in the value of bitcoin. While the Long Bitcoin Fund intends to invest primarily in Bitcoin Futures Contracts,\18\ it may also invest in other Listed Bitcoin Derivatives,\19\ OTC Bitcoin Derivatives,\20\ U.S. exchange-listed ETPs,\21\ and Non-U.S. Component Stocks (collectively, ``Bitcoin Instruments''), cash and Cash Equivalents,\22\ and U.S. government and agency securities with maturities of five years or less (``GSE Securities''). While the Long Bitcoin Fund intends to invest primarily in Bitcoin Instruments, the remainder of the Fund's assets will primarily be invested in cash, Cash Equivalents, and GSE Securities. The Long Bitcoin Fund intends to use such instruments as investments and, to the extent applicable, to collateralize the Fund's Bitcoin Instrument exposure on a day-to-day basis.\23\ --------------------------------------------------------------------------- \17\ The term ``Normal Market Conditions'' includes, but is not limited to, the absence of trading halts in the applicable financial markets generally; operational issues causing dissemination of inaccurate market information or system failures; or force majeure type events such as natural or man-made disaster, act of God, armed conflict, act of terrorism, riot or labor disruption, or any similar intervening circumstance. On a temporary basis, including for defensive purposes, during the initial invest-up period (i.e., the six-week period following the commencement of trading of Shares on the Exchange) and during periods of high cash inflows or outflows, the Long Bitcoin Fund may depart from its principal investment strategies; for example, it may hold a higher than normal proportion of its assets in cash. During such periods, the Long Bitcoin Fund may not be able to achieve its investment objective. The Long Bitcoin Fund may adopt a defensive strategy when the Adviser believes instruments in which the Long Bitcoin Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances. \18\ For purposes of this proposal, the term ``Bitcoin Futures Contracts'' shall mean XBT Futures, CME Futures, and any other exchange-listed bitcoin futures contracts, as available. \19\ The term ``Listed Bitcoin Derivatives'' includes Bitcoin Futures Contracts and other listed derivatives (as provided in Rule 14.11(i)(4)(C)(iv)) including options contracts on Bitcoin Futures Contracts as well as options contracts, swap contracts, and other derivative instruments linked to bitcoin, the price of bitcoin, or an index thereof. \20\ The term ``OTC Bitcoin Derivatives'' includes over-the- counter options on bitcoin and bitcoin indices and over-the-counter swaps, including total return swaps on bitcoin, Bitcoin Futures, or bitcoin indices. The Exchange notes that the Long Bitcoin Fund's holdings in OTC Bitcoin Derivatives will meet the Generic Listing Standards related to OTC derivatives under Rule 14.11(i)(4)(C)(v). \21\ For purposes of this filing, the term ``ETP'' means Portfolio Depository Receipts, Index Fund Shares, Linked Securities, Trust Issued Receipts, and Managed Fund Shares, as defined in Rule 14.11(b), 14.11(c), 14.11(d), 14.11(f), and 14.11(i), respectively, and the analogous products and listing rules on other national securities exchanges. \22\ As defined in Rule 14.11(i)(4)(C)(iii), Cash Equivalents are short-term instruments with maturities of less than three months, including: (i) U.S. Government securities, including bills, notes, and bonds differing as to maturity and rates of interest, which are either issued or guaranteed by the U.S. Treasury or by U.S. Government agencies or instrumentalities; (ii) certificates of deposit issued against funds deposited in a bank or savings and loan association; (iii) bankers acceptances, which are short-term credit instruments used to finance commercial transactions; (iv) repurchase agreements and reverse repurchase agreements; (v) bank time deposits, which are monies kept on deposit with banks or savings and loan associations for a stated period of time at a fixed rate of interest; (vi) commercial paper, which are short-term unsecured promissory notes; and (vii) money market funds. \23\ The Exchange notes that the Long Bitcoin Fund's holdings in cash, Cash Equivalents, and GSE Securities will meet the Generic Listing Standards related to fixed income securities and cash and cash equivalents under Rules 14.11(i)(4)(C)(ii) and (iii). --------------------------------------------------------------------------- First Trust Inverse Bitcoin Strategy ETF According to the Registration Statement, the Inverse Bitcoin Fund seeks to provide investors with short exposure to the price movements of bitcoin instruments. Under Normal Market Conditions, the Inverse Bitcoin Fund seeks to achieve its investment objective by investing in a portfolio of financial instruments that provide short exposure to movements in the value of bitcoin.\24\ While the Inverse Bitcoin Fund intends to invest primarily in Bitcoin Futures Contracts, it may also invest in Bitcoin Instruments,\25\ cash and Cash Equivalents, and GSE Securities. While the Inverse Bitcoin Fund intends to invest primarily in Bitcoin Instruments, the remainder of the Inverse Bitcoin Fund's assets will primarily be invested in cash, Cash Equivalents, and GSE Securities. The Inverse Bitcoin Fund intends to use such instruments as investments and, to the extent applicable, to collateralize the Inverse Bitcoin Fund's Bitcoin Instrument exposure on a day-to-day basis.\26\ --------------------------------------------------------------------------- \24\ On a temporary basis, including for defensive purposes, during the initial invest-up period (i.e., the six-week period following the commencement of trading of Shares on the Exchange) and during periods of high cash inflows or outflows, the Inverse Bitcoin Fund may depart from its principal investment strategies; for example, it may hold a higher than normal proportion of its assets in cash. During such periods, the Inverse Bitcoin Fund may not be able to achieve its investment objective. The Inverse Bitcoin Fund may adopt a defensive strategy when the Adviser believes instruments in which the Inverse Bitcoin Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances. \25\ The Exchange notes that the Inverse Bitcoin Fund's holdings in OTC Bitcoin Derivatives, which are included in the definition of Bitcoin Instruments, will meet the Generic Listing Standards related to OTC derivatives under Rule 14.11(i)(4)(C)(v). \26\ The Exchange notes that the Inverse Bitcoin Fund's holdings in cash, Cash Equivalents, and GSE Securities will meet the Generic Listing Standards related to fixed income securities and cash and cash equivalents under Rules 14.11(i)(4)(C)(ii) and (iii). --------------------------------------------------------------------------- Investment Restrictions Each Fund may hold up to an aggregate amount of 15% of its net assets in illiquid assets (calculated at the time of investment) deemed illiquid by the Adviser \27\ under the 1940 Act.\28\ Each Fund will monitor its portfolio liquidity on an ongoing basis to determine whether, in light of current circumstances, an adequate level of liquidity is being maintained, and will consider taking appropriate steps in order to maintain adequate liquidity if, through a change in values, net assets, or other circumstances, more than 15% of a Fund's net assets are held in illiquid assets. Illiquid assets include assets subject to contractual or other restrictions on resale and other instruments that lack readily available markets as determined in accordance with Commission staff guidance. --------------------------------------------------------------------------- \27\ In reaching liquidity decisions, the Adviser may consider the following factors: The frequency of trades and quotes for the security; the number of dealers wishing to purchase or sell the security and the number of other potential purchasers; dealer undertakings to make a market in the security; and the nature of the security and the nature of the marketplace trades (e.g., the time needed to dispose of the security, the method of soliciting offers, and the mechanics of transfer). \28\ The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15% of their net assets in illiquid securities and other illiquid assets. See Investment Company Act Release No. 28193 (March 11, 2008), 73 FR 14618 (March 18, 2008), footnote 34. See also, Investment Company Act Release No. 5847 (October 21, 1969), 35 FR 19989 (December 31, 1970) (Statement Regarding ``Restricted Securities''); Investment Company Act Release No. 18612 (March 12, 1992), 57 FR 9828 (March 20, 1992) (Revisions of Guidelines to Form N-1A). A fund's portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund. See Investment Company Act Release No. 14983 (March 12, 1986), 51 FR 9773 (March 21, 1986) (adopting amendments to Rule 2a-7 under the 1940 Act); Investment Company Act Release No. 17452 (April 23, 1990), 55 FR 17933 (April 30, 1990) (adopting Rule 144A under the Securities Act of 1933). --------------------------------------------------------------------------- Under Normal Market Conditions, each Fund's investments 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).\29\ Each Fund's [[Page 932]] investments will not be used to seek leveraged or inverse leveraged returns (i.e. two times or three times the Fund's benchmark). Each Fund's use of derivative instruments will be collateralized or earmarked. --------------------------------------------------------------------------- \29\ Each Fund will include appropriate risk disclosure in its offering documents, including leveraging risk. Leveraging risk is the risk that certain transactions of a fund, including a fund's use of derivatives, may give rise to leverage, causing a fund to be more volatile than if it had not been leveraged. Each Fund's investments in derivative instruments will be made in accordance with the 1940 Act and consistent with each Fund's investment objective and policies. To mitigate leveraging risk, each Fund will segregate or earmark liquid assets determined to be liquid by the Adviser in accordance with procedures established by the Trust's Board and in accordance with the 1940 Act or otherwise cover the transactions that give rise to such risk. These procedures have been adopted consistent with Section 18 of the 1940 Act and related Commission guidance. See 15 U.S.C. 80a 18; Investment Company Act Release No. 10666 (April 18, 1979), 44 FR 25128 (April 27, 1979); Dreyfus Strategic Investing, Commission No-Action Letter (June 22, 1987); Merrill Lynch Asset Management, L.P., Commission No-Action Letter (July 2, 1996). --------------------------------------------------------------------------- Additional Information Each Fund's holdings will meet the Generic Listing Standards with two exceptions, and, as such, the Exchange submits this proposal in order to allow each Fund to hold: (i) listed derivatives in a manner that does not comply with Rule 14.11(i)(4)(C)(iv)(b); \30\ and (ii) Non-U.S. Component Stocks in a manner that may not comply with Rules 14.11(i)(4)(C)(i)(b)(3) \31\ and (4).\32\ The Exchange, however, believes that the policy concerns that these rules are intended to address are mitigated as they relate to the Funds and their holdings for a number of reasons. --------------------------------------------------------------------------- \30\ See note 12, supra. \31\ See note 14, supra. \32\ See note 15, supra. --------------------------------------------------------------------------- First, the policy concerns underlying all three rules are mitigated by the fact that the Exchange believes that the underlying reference asset is not susceptible to manipulation because the nature of the bitcoin ecosystem makes manipulation of bitcoin difficult. The geographically diverse and continuous nature of bitcoin trading makes it difficult and prohibitively costly to manipulate the price of bitcoin and, in many instances, the bitcoin market is generally less susceptible to manipulation than the equity, fixed income, and commodity futures markets. There are a number of reasons this is the case, including that there is not inside information about revenue, earnings, corporate activities, or sources of supply; manipulation of the price on any single venue would require manipulation of the global bitcoin price in order to be effective; a substantial over-the-counter market provides liquidity and shock-absorbing capacity; bitcoin's 24/7/ 365 nature provides constant arbitrage opportunities across all trading venues; and it is unlikely that any one actor could obtain a dominant market share. Further, bitcoin is arguably less susceptible to manipulation than other commodities that underlie ETPs; there may be inside information relating to the supply of the physical commodity such as the discovery of new sources of supply or significant disruptions at mining facilities that supply the commodity that simply are inapplicable as it relates to bitcoin. Further, the Exchange believes that the fragmentation across bitcoin exchanges, the relatively slow speed of transactions, and the capital necessary to maintain a significant presence on each exchange make manipulation of bitcoin prices through continuous trading activity unlikely. Moreover, the linkage between the bitcoin markets and the presence of arbitrageurs in those markets means that the manipulation of the price of bitcoin price on any single venue would require manipulation of the global bitcoin price in order to be effective. Arbitrageurs must have funds distributed across multiple bitcoin exchanges in order to take advantage of temporary price dislocations, thereby making it unlikely that there will be strong concentration of funds on any particular bitcoin exchange. As a result, the potential for manipulation on a particular bitcoin exchange would require overcoming the liquidity supply of such arbitrageurs who are effectively eliminating any cross-market pricing differences. For all of these reasons, bitcoin is not particularly susceptible to manipulation, especially as compared to other approved ETP reference assets. Second, the Exchange believes that the concerns on which Rule 14.11(i)(4)(C)(iv)(b) are based related to ensuring that no single listed derivative and underlying reference asset that is susceptible to manipulation constitutes greater than 35% of the weight of the portfolio are further mitigated by the liquidity that the Exchange expects to exist in the market for Listed Bitcoin Derivatives. This belief is based on numerous conversations with market participants, issuers, and discussions with personnel of CFE. This expected liquidity in the market for Bitcoin Futures Contracts, the surveillance programs of the futures exchanges listing such Bitcoin Futures Contracts, Exchange surveillance procedures related to trading in the Shares, and CFTC oversight of the Bitcoin Futures Contracts, all combined with the difficulty in manipulating the bitcoin market described above will mitigate the concerns that Rule 14.11(i)(4)(C)(iv)(b) was designed to protect against and further prevent trading in the Shares from being susceptible to manipulation. Third, the Exchange believes that the market cap and liquidity of the Non-U.S. Component Stocks held by the Funds along with a cap at 25% of each Fund's total assets that can be allocated to Non-U.S. Component Stocks would mitigate the concerns which Rules 14.11(i)(4)(C)(i)(b)(3) and (4) are intended to address. Any Non-U.S. Component Stock held by the Funds will have at least $100 million in market cap and will have a minimum global monthly trading volume of 250,000 shares, or a minimum global notional volume traded per month of $25 million, averaged over the last six months. This combination of large market cap with significant trading volume reduces the likelihood of manipulation of any particular security and the cap of 25% of the Fund's total assets assures that, while the Non-U.S. Component Stock holdings may not meet the concentration and diversity requirements of Rules 14.11(i)(4)(C)(i)(b)(3) and (4), respectively, such diversity and concentration requirements will not be met only for a limited portion of the portfolio. The Exchange represents that, except for the diversification requirements for listed derivatives in Rule 14.11(i)(4)(C)(iv)(b) and the concentration and diversification requirements for Non-U.S. Component Stocks in Rules 14.11(i)(4)(C)(i)(b)(3) and (4), the Funds' proposed investments will satisfy, on an initial and continued listing basis, all of the Generic Listing Standards and all other applicable requirements for Managed Fund Shares under Rule 14.11(i). The Trust is required to comply with Rule 10A-3 under the Act for the initial and continued listing of the Shares of the Funds. A minimum of 100,000 Shares will be outstanding at the commencement of trading on the Exchange. In addition, the Exchange represents that the Shares of the Funds will comply with all other requirements applicable to Managed Fund Shares, which includes the dissemination of key information such as the Disclosed Portfolio,\33\ Net Asset Value,\34\ and the Intraday Indicative Value,\35\ suspension of trading or removal,\36\ trading halts,\37\ surveillance,\38\ minimum price variation for quoting and order entry,\39\ and the information circular,\40\ as set forth in Exchange rules applicable to Managed Fund Shares. Moreover, at least 90% of the weight of the Listed Bitcoin Derivatives held by each Fund will consist of instruments that trade on markets that are a member of the Intermarket Surveillance Group (``ISG'') or affiliated with a member of ISG or with which the Exchange has in place [[Page 933]] a comprehensive surveillance sharing agreement. 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, and quotation and last sale information will be available via the CTA high-speed line. Quotation, intra-day, closing and settlement prices of Listed Bitcoin Derivatives will be readily available from their respective exchange or swap execution facility, as applicable, as well as through automated quotation systems, published or other public sources, or online information services such as Bloomberg or Reuters. Quotation, intra- day, closing and settlement prices of U.S. exchange-listed ETPs will be readily available from the listing exchange, automated quotation systems, published or other public sources, or online information services such as Bloomberg or Reuters. Quotation information for OTC Bitcoin Derivatives may be obtained from brokers and dealers who make markets in such instruments. Quotation, intra-day, closing and settlement prices of Non-U.S. Component Stocks will be readily available from automated quotation systems, published or other public sources, or online information services such as Bloomberg or Reuters. Price information on Cash Equivalents and GSE Securities is available from major broker-dealer firms or market data vendors, as well as from automated quotation systems, published or other public sources, or online information services. --------------------------------------------------------------------------- \33\ See Rule 14.11(i)(4)(A)(ii) and 14.11(i)(4)(B)(ii). \34\ See Rule 14.11(i)(4)(A)(ii). \35\ See Rule 14.11(i)(4)(B)(i). \36\ See Rule 14.11(i)(4)(B)(iii). \37\ See Rule 14.11(i)(4)(B)(iv). \38\ See Rule 14.11(i)(2)(C). \39\ See Rule 14.11(i)(2)(B). \40\ See Rule 14.11(i)(6). --------------------------------------------------------------------------- The Exchange believes that its surveillance procedures are adequate to properly monitor the trading of the Shares on the Exchange during all trading sessions and to deter and detect violations of Exchange rules and the applicable federal securities laws. Additionally, the Listed Bitcoin Derivatives will be subject to the rules and surveillance programs of their respective listing venue and the CFTC.\41\ Trading of the Shares through the Exchange will be subject to the Exchange's surveillance procedures for derivative products, including Managed Fund Shares. The Exchange or FINRA, on behalf of the Exchange, will communicate as needed regarding trading in the Shares and the underlying Listed Bitcoin Derivatives with the ISG, other exchanges who are members or affiliates of the ISG, or with which the Exchange has entered into a comprehensive surveillance sharing agreement.\42\ The Exchange may also obtain information regarding trading in the spot bitcoin market via exchanges with which the Exchange has entered into a comprehensive surveillance sharing agreement. In addition, the Exchange is able to access, as needed, trade information for certain fixed income instruments reported to FINRA's Trade Reporting and Compliance Engine (``TRACE''). The Exchange prohibits the distribution of material non-public information by its employees. --------------------------------------------------------------------------- \41\ The CFTC issued a press release on December 1, 2017, noting the self-certifications from CFE and CME and highlighting the rigorous process that the CFTC had undertaken in its engagement with CFE and CME prior to the self-certification for the applicable Bitcoin Futures Contracts. The press release focused on the ongoing surveillances that will occur on each listing exchange, including surveillance based on information sharing with the underlying cash bitcoin exchanges as well as the actions that the CFTC will undertake after the contracts are launched, including monitoring and analyzing the size and development of the market, positions and changes in positions over time, open interest, initial margin requirements, and variation margin payments, stress testing positions, conduct reviews of designated contract markets, derivatives clearing organizations, clearing firms, and individual traders involved in trading and clearing bitcoin futures. For more information, see http://www.cftc.gov/PressRoom/PressReleases/pr7654-17. \42\ For a list of the current members and affiliate members of ISG, see www.isgportal.com. The Exchange notes that not all components of the Disclosed Portfolio for a Fund may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement. At least 90% of the weight of the Listed Bitcoin Derivatives held by each Fund will consist of instruments that 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. --------------------------------------------------------------------------- 2. Statutory Basis The Exchange believes that the proposal is consistent with Section 6(b) of the Act \43\ in general and Section 6(b)(5) of the Act \44\ in particular in that 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 facilitating transactions in securities, 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. --------------------------------------------------------------------------- \43\ 15 U.S.C. 78f. \44\ 15 U.S.C. 78f(b)(5). --------------------------------------------------------------------------- The Exchange believes that the proposed rule change is designed to prevent fraudulent and manipulative acts and practices in that the Shares will meet each of the initial and continued listing criteria in BZX Rule 14.11(i) except that each Fund may hold: (i) Listed derivatives in a manner that does not comply with Rule 14.11(i)(4)(C)(iv)(b); \45\ and (ii) Non-U.S. Component Stocks in a manner that may not comply with Rule 14.11(i)(4)(C)(i)(b)(3) \46\ and (4).\47\ The Exchange, however, believes that the policy concerns that these rules are intended to address are mitigated as they relate to the Funds and their holdings for a number of reasons. --------------------------------------------------------------------------- \45\ See note 12, supra. \46\ See note 14, supra. \47\ See note 15, supra. --------------------------------------------------------------------------- First, the policy concerns underlying all three rules are mitigated by the fact that the Exchange believes that the underlying reference asset is not susceptible to manipulation because the nature of the bitcoin ecosystem makes manipulation of bitcoin difficult. The geographically diverse and continuous nature of bitcoin trading makes it difficult and prohibitively costly to manipulate the price of bitcoin and, in many instances, the bitcoin market is generally less susceptible to manipulation than the equity, fixed income, and commodity futures markets. There are a number of reasons this is the case, including that there is not inside information about revenue, earnings, corporate activities, or sources of supply; manipulation of the price on any single venue would require manipulation of the global bitcoin price in order to be effective; a substantial over-the-counter market provides liquidity and shock-absorbing capacity; bitcoin's 24/7/ 365 nature provides constant arbitrage opportunities across all trading venues; and it is unlikely that any one actor could obtain a dominant market share. Further, bitcoin is arguably less susceptible to manipulation than other commodities that underlie ETPs; there may be inside information relating to the supply of the physical commodity such as the discovery of new sources of supply or significant disruptions at mining facilities that supply the commodity that simply are inapplicable as it relates to bitcoin. Further, the Exchange believes that the fragmentation across bitcoin exchanges, the relatively slow speed of transactions, and the capital necessary to maintain a significant presence on each exchange make manipulation of bitcoin prices through continuous trading activity unlikely. Moreover, the linkage between the bitcoin markets and the presence of arbitrageurs in those markets means that the manipulation of the price of bitcoin price on any single venue would require manipulation of the global bitcoin price in order to be effective. Arbitrageurs must have funds distributed across multiple bitcoin exchanges in order to take advantage of temporary price dislocations, thereby [[Page 934]] making it unlikely that there will be strong concentration of funds on any particular bitcoin exchange. As a result, the potential for manipulation on a particular bitcoin exchange would require overcoming the liquidity supply of such arbitrageurs who are effectively eliminating any cross-market pricing differences. For all of these reasons, bitcoin is not particularly susceptible to manipulation, especially as compared to other approved ETP reference assets. Second, the Exchange believes that the concerns on which Rule 14.11(i)(4)(C)(iv)(b) are based related to ensuring that no single listed derivative and underlying reference asset that is susceptible to manipulation constitutes greater than 35% of the weight of the portfolio are further mitigated by the liquidity that the Exchange expects to exist in the market for Listed Bitcoin Derivatives. This belief is based on numerous conversations with market participants, issuers, and discussions with personnel of CFE. This expected liquidity in the market for Bitcoin Futures Contracts, the surveillance programs of the futures exchanges listing such Bitcoin Futures Contracts, Exchange surveillance procedures related to trading in the Shares, and CFTC oversight of the Bitcoin Futures Contracts, all combined with the difficulty in manipulating the bitcoin market described above will mitigate the concerns that Rule 14.11(i)(4)(C)(iv)(b) was designed to protect against and further prevent trading in the Shares from being susceptible to manipulation. Third, the Exchange believes that the market cap and liquidity of the Non-U.S. Component Stocks held by the Funds along with a cap at 25% of each Fund's total assets that can be allocated to Non-U.S. Component Stocks would mitigate the concerns which Rules 14.11(i)(4)(C)(i)(b)(3) and (4) are intended to address. Any Non-U.S. Component Stock held by the Funds will have at least $100 million in market cap and will have a minimum global monthly trading volume of 250,000 shares, or a minimum global notional volume traded per month of $25 million, averaged over the last six months. This combination of large market cap with significant trading volume reduces the likelihood of manipulation of any particular security and the cap of 25% of the Fund's total assets assures that, while the Non-U.S. Component Stock holdings may not meet the concentration and diversity requirements of Rules 14.11(i)(4)(C)(i)(b)(3) and (4), respectively, such diversity and concentration requirements will not be met only for a limited portion of the portfolio. The Exchange believes that its surveillance procedures are adequate to properly monitor the trading of the Shares on the Exchange during all trading sessions and to deter and detect violations of Exchange rules and the applicable federal securities laws. Additionally, the Listed Bitcoin Derivatives will be subject to the rules and surveillance programs of their respective listing venue and the CFTC.\48\ Trading of the Shares through the Exchange will be subject to the Exchange's surveillance procedures for derivative products, including Managed Fund Shares. The Exchange or FINRA, on behalf of the Exchange, will communicate as needed regarding trading in the Shares and the underlying Listed Bitcoin Derivatives with the ISG, other exchanges who are members or affiliates of the ISG, or with which the Exchange has entered into a comprehensive surveillance sharing agreement.\49\ The Exchange may also obtain information regarding trading in the spot bitcoin market via exchanges with which the Exchange has entered into a comprehensive surveillance sharing agreement. In addition, the Exchange is able to access, as needed, trade information for certain fixed income instruments reported to TRACE. The Exchange prohibits the distribution of material non-public information by its employees. If the investment adviser to the investment company issuing Managed Fund Shares is affiliated with a broker-dealer, such investment adviser to the investment company shall erect a ``fire wall'' between the investment adviser and the broker- dealer with respect to access to information concerning the composition and/or changes to such investment company portfolio. The Adviser is not a registered broker-dealer, but is affiliated with a broker-dealer and has implemented a ``fire wall'' with respect to such broker-dealer regarding access to information concerning the composition and/or changes to the Fund's portfolio. The Exchange may obtain information regarding trading in the Shares and the underlying futures contracts held by the Funds via the ISG from other exchanges who are members or affiliates of the ISG or with which the Exchange has entered into a comprehensive surveillance sharing agreement.\50\ In addition, the Exchange is able to access, as needed, trade information for certain fixed income instruments reported to FINRA's TRACE. --------------------------------------------------------------------------- \48\ See note 41, supra. \49\ See note 42, supra. \50\ See note 42, supra. --------------------------------------------------------------------------- The Exchange further believes that the proposal is designed to prevent fraudulent and manipulative acts and practices in that the Exchange expects that the market for Bitcoin Futures Contracts will be sufficiently liquid to support numerous ETPs shortly after launch. This belief is based on numerous conversations with market participants, issuers, and discussions with personnel of CFE. As such, the Exchange believes that the expected liquidity in the market for Listed Bitcoin Derivatives combined with the Exchange surveillance procedures related to the Shares and the broader regulatory structure will prevent trading in the Shares from being susceptible to manipulation. Because of its innovative features as a cryptoasset, bitcoin has gained wide acceptance as a secure means of exchange in the commercial marketplace and has generated significant interest among investors. In less than a decade since its creation in 2008, bitcoin has achieved significant market penetration, with payments giant PayPal and thousands of merchants and businesses accepting it as a form of commercial payment, as well as receiving official recognition from several governments, including Japan and Australia. Accordingly, investor interest in gaining exposure to bitcoin is increasing exponentially as well. As expected, the total volume of bitcoin transactions in the market continues to grow exponentially. Despite the growing investor interest in bitcoin, the primary means for investors to gain access to bitcoin exposure remains either through the Listed Bitcoin Derivatives or direct investment through bitcoin exchanges or over-the-counter trading. For regular investors simply wishing to express an investment viewpoint in bitcoin, investment through the Listed Bitcoin Derivatives is complex and requires active management and direct investment in bitcoin brings with it significant inconvenience, complexity, expense and risk. The Shares would therefore represent a significant innovation in the bitcoin market by providing an inexpensive and simple vehicle for investors to gain long or short exposure to bitcoin in a secure and easily accessible product that is familiar and transparent to investors. Such an innovation would help to perfect the mechanism of a free and open market and, in general, to protect investors and the public interest by improving investor access to bitcoin exposure [[Page 935]] through efficient and transparent exchange-traded derivative products. In addition to improved convenience, efficiency and transparency, the Funds will also help to prevent fraudulent and manipulative acts and practices by enhancing the security afforded to investors as compared to a direct investment in bitcoin. Despite the extensive security mechanisms built into the Bitcoin Network, a remaining risk to owning bitcoin directly is the need for the holder to retain and protect the ``private key'' required to spend or sell bitcoin after purchase. If a holder's private key is compromised or simply lost, their bitcoin can be rendered unavailable--i.e., effectively lost to the investor. This risk will be eliminated by the Long Bitcoin Fund because the exposure to bitcoin is gained through cash-settled Listed Bitcoin Derivatives that do not present any of the security issues that exist with direct investment in bitcoin. Additionally, the Funds may each hold up to an aggregate amount of 15% of its net assets in illiquid assets (calculated at the time of investment). Each Fund will monitor its portfolio liquidity on an ongoing basis to determine whether, in light of current circumstances, an adequate level of liquidity is being maintained, and will consider taking appropriate steps in order to maintain adequate liquidity if, through a change in values, net assets, or other circumstances, more than 15% of the Fund's net assets are held in illiquid assets. Illiquid assets include assets subject to contractual or other restrictions on resale and other instruments that lack readily available markets as determined in accordance with Commission staff guidance. The proposed rule change is designed to promote just and equitable principles of trade and to protect investors and the public interest in that the Exchange will obtain a representation from the issuer of the Shares that the NAV will be calculated daily and that the NAV and the Disclosed Portfolio will be made available to all market participants at the same time. In addition, a large amount of information is publicly available regarding the Funds and the Shares, thereby promoting market transparency. Moreover, the Intraday Indicative Value will be disseminated by one or more major market data vendors at least every 15 seconds during Regular Trading Hours. On each business day, before commencement of trading in Shares during Regular Trading Hours, each Fund will disclose on its website the Disclosed Portfolio that will form the basis for the Fund's calculation of NAV at the end of the business day. Pricing information will be available on each Fund's website including: (1) The prior business day's reported NAV, the Bid/ Ask Price of the Fund, and a calculation of the premium and discount of the Bid/Ask Price against the NAV; and (2) data in chart format displaying the frequency distribution of discounts and premiums of the daily Bid/Ask Price against the NAV, within appropriate ranges, for each of the four previous calendar quarters. Additionally, information regarding market price and trading of the Shares will be continually available on a real-time basis throughout the day on brokers' computer screens and other electronic services, and quotation and last sale information for the Shares will be available on the facilities of the CTA. The website for the Funds will include a form of the prospectus for the Funds and additional data relating to NAV and other applicable quantitative information. Trading in Shares of the Funds will be halted under the conditions specified in BZX Rule 11.18. Trading may also be halted because of market conditions or for reasons that, in the view of the Exchange, make trading in the Shares inadvisable. Finally, trading in the Shares will be subject to BZX Rule 14.11(i)(4)(B)(iv), which sets forth circumstances under which the Shares of each Fund may be halted. In addition, as noted above, investors will have ready access to information regarding the Fund's holdings, the Intraday Indicative Value, the Disclosed Portfolio, and quotation and last sale information for the Shares. 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, and quotation and last sale information will be available via the CTA high- speed line. Quotation, intra-day, closing and settlement prices of Listed Bitcoin Derivatives will be readily available from their respective exchange or swap execution facility, as applicable, as well as through automated quotation systems, published or other public sources, or online information services such as Bloomberg or Reuters. Quotation, intra-day, closing and settlement prices of U.S. exchange- listed ETPs will be readily available from the listing exchange, automated quotation systems, published or other public sources, or online information services such as Bloomberg or Reuters. Quotation information for OTC Bitcoin Derivatives may be obtained from brokers and dealers who make markets in such instruments. Quotation, intra-day, closing and settlement prices of Non-U.S. Component Stocks will be readily available from automated quotation systems, published or other public sources, or online information services such as Bloomberg or Reuters. Price information on Cash Equivalents and GSE Securities is available from major broker-dealer firms or market data vendors, as well as from automated quotation systems, published or other public sources, or online information services. The proposed rule change is designed to perfect the mechanism of a free and open market and, in general, to protect investors and the public interest in that it will facilitate the listing and trading of additional types of actively-managed exchange-traded product [sic] that will enhance competition among market participants, to the benefit of investors and the marketplace. As noted above, the Exchange has in place surveillance procedures relating to trading in the Shares and may obtain information via ISG from other exchanges that are members of ISG or affiliated with a member of ISG or with which the Exchange has entered into a comprehensive surveillance sharing agreement as well as trade information for certain fixed income instruments as reported to FINRA's TRACE. At least 90% of the weight of the Listed Bitcoin Derivatives held by each Fund will consist of instruments that 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. In addition, as noted above, investors will have ready access to information regarding the Fund's holdings, the Intraday Indicative Value, the Disclosed Portfolio, and quotation and last sale information for the Shares. For the above reasons, the Exchange believes that the proposed rule change is consistent with the requirements of Section 6(b)(5) of the Act. (B) Self-Regulatory Organization's Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purpose of the Act. The Exchange notes that the proposed rule change, rather will facilitate the listing and trading of additional actively-managed exchange-traded products that will enhance competition among both market participants and listing venues, to the benefit of investors and the marketplace. [[Page 936]] (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 the 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 CommentsUse 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-CboeBZX-2017-021 on the subject line. Paper Comments Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090. All submissions should refer to File Number SR-CboeBZX-2017-021. 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 will also be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-CboeBZX-2017-021 and should be submitted on or before January 29, 2018. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\51\ --------------------------------------------------------------------------- \51\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2018-00077 Filed 1-5-18; 8:45 am] BILLING CODE 8011-01-P
![Federal Register / Vol. 83, No. 5 / Monday, January 8, 2018 / Notices 929
those that may be withheld from the I. Self-Regulatory Organization’s Commission.4 The Adviser, as defined
public in accordance with the Statement of the Terms of Substance of below, is also registered as a Commodity
provisions of 5 U.S.C. 552, will be the Proposed Rule Change Pool Operator.
available for website viewing and First Trust Advisors L.P. is the
printing in the Commission’s Public The Exchange filed a proposal to list investment adviser (the ‘‘Adviser’’) to
Reference Room, 100 F Street NE, and trade shares of the First Trust the Funds and a commodity pool
Washington, DC 20549 on official Bitcoin Strategy ETF and the First Trust operator (‘‘CPO’’). The Funds will be
business days between the hours of Inverse Bitcoin Strategy ETF (each a operated in accordance with applicable
10:00 a.m. and 3:00 p.m. Copies of the ‘‘Fund’’ and, collectively, the ‘‘Funds’’), Commodity Futures Trading
filing also will be available for each a series of the First Trust Commission (‘‘CFTC’’) rules, as well as
inspection and copying at the principal Exchange-Traded Fund VII (the the regulatory scheme applicable to
office of DTC and on DTCC’s website ‘‘Trust’’), under Rule 14.11(i) (‘‘Managed registered investment companies.
(http://dtcc.com/legal/sec-rule- Fund Shares’’). The shares of the Funds Registration as a CPO imposes
filings.aspx). All comments received are referred to herein as the ‘‘Shares.’’ additional compliance obligations on
will be posted without change. Persons The text of the proposed rule change the Adviser and the Funds related to
submitting comments are cautioned that is available at the Exchange’s website at additional laws, regulations, and
we do not redact or edit personal www.markets.cboe.com, at the principal enforcement policies.
identifying information from comment office of the Exchange, and at the Rule 14.11(i)(7) provides that, if the
submissions. You should submit only Commission’s Public Reference Room. investment adviser to the investment
information that you wish to make II. Self-Regulatory Organization’s company issuing Managed Fund Shares
available publicly. All submissions Statement of the Purpose of, and is affiliated with a broker-dealer, such
should refer to File Number SR–DTC– Statutory Basis for, the Proposed Rule investment adviser shall erect a ‘‘fire
2017–023 and should be submitted on Change wall’’ between the investment adviser
or before January 29, 2018. and the broker-dealer with respect to
In its filing with the Commission, the access to information concerning the
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
Exchange included statements composition and/or changes to such
authority.12 concerning the purpose of and basis for investment company portfolio.5 In
Eduardo A. Aleman,
the proposed rule change and discussed
any comments it received on the 4 See Registration Statement on Form N–1A for
Assistant Secretary.
proposed rule change. The text of these the Trust, dated December 11, 2017 (File Nos. 333–
[FR Doc. 2018–00081 Filed 1–5–18; 8:45 am] 184918 and 811–22767). The descriptions of the
statements may be examined at the
BILLING CODE 8011–01–P Funds and the Shares contained herein are based,
places specified in Item IV below. The in part, on information in the Registration
Exchange has prepared summaries, set Statement. The Commission has issued an order,
forth in Sections A, B, and C below, of upon which the Trust may rely, granting certain
SECURITIES AND EXCHANGE the most significant parts of such exemptive relief under the Investment Company
COMMISSION statements.
Act of 1940 (15 U.S.C. 80a–1) (‘‘1940 Act’’) (the
‘‘Exemptive Order’’). See Investment Company Act
Release No. 30029, April 10, 2012 (File No. 812–
[Release No. 34–82429; File No. SR– (A) Self-Regulatory Organization’s 13795). In addition, on December 6, 2012, the staff
CboeBZX–2017–021] Statement of the Purpose of, and of the Commission’s Division of Investment
Statutory Basis for, the Proposed Rule Management (‘‘Division’’) issued a no-action letter
Self-Regulatory Organizations; Cboe Change (‘‘No-Action Letter’’) relating to the use of
derivatives by actively-managed exchange-traded
BZX Exchange, Inc.; Notice of Filing of
1. Purpose funds (‘‘ETFs’’). See No-Action Letter dated
a Proposed Rule Change To List and December 6, 2012 from Elizabeth G. Osterman,
Trade Shares of the First Trust Bitcoin The Exchange proposes to list and Associate Director, Office of Exemptive
Strategy ETF and the First Trust trade shares of the First Trust Bitcoin Applications, Division of Investment Management.
The No-Action Letter stated that the Division would
Inverse Bitcoin Strategy ETF, Each a Strategy ETF (the ‘‘Long Bitcoin Fund’’) not recommend enforcement action to the
Series of the First Trust Exchange- and the First Trust Inverse Bitcoin Commission under applicable provisions of and
Traded Fund VII, Under Rule 14.11(i), Strategy ETF (the ‘‘Inverse Bitcoin rules under the 1940 Act if ETFs operating in
Managed Fund Shares Fund’’) under Rule 14.11(i), which reliance on specified orders (which include the
Exemptive Order) invest in options contracts,
governs the listing and trading of futures contracts, or swap agreements provided that
January 2, 2018.
Managed Fund Shares on the they comply with certain representations stated in
Pursuant to Section 19(b)(1) of the Exchange.3 the No-Action Letter.
Securities Exchange Act of 1934 (the The Shares will be offered by the
5 An investment adviser to an open-end fund is
‘‘Act’’),1 and Rule 19b–4 thereunder,2 required to be registered under the Investment
Trust, which was organized as a Advisers Act of 1940, as amended (the ‘‘Advisers
notice is hereby given that on December Massachusetts business trust on Act’’). As a result, the Adviser and its related
19, 2017, Cboe BZX Exchange, Inc. (the November 6, 2012. The Trust is personnel are subject to the provisions of Rule
‘‘Exchange’’ or ‘‘BZX’’) filed with the registered with the Commission as an 204A–1 under the Advisers Act relating to codes of
Securities and Exchange Commission ethics. This Rule requires investment advisers to
open-end investment company and has adopt a code of ethics that reflects the fiduciary
(‘‘Commission’’) the proposed rule filed a registration statement on behalf nature of the relationship to clients as well as
change as described in Items I and II of the Funds on Form N–1A compliance with other applicable securities laws.
below, which Items have been prepared (‘‘Registration Statement’’) with the Accordingly, procedures designed to prevent the
communication and misuse of non-public
sradovich on DSK3GMQ082PROD with NOTICES
by the Exchange. The Commission is
information by an investment adviser must be
publishing this notice to solicit 3 The Commission originally approved BZX Rule consistent with Rule 204A–1 under the Advisers
comments on the proposed rule change 14.11(i) in Securities Exchange Act Release No. Act. In addition, Rule 206(4)–7 under the Advisers
from interested persons. 65225 (August 30, 2011), 76 FR 55148 (September Act makes it unlawful for an investment adviser to
6, 2011) (SR–BATS–2011–018) and subsequently provide investment advice to clients unless such
approved generic listing standards for Managed investment adviser has (i) adopted and
12 17 CFR 200.30–3(a)(12). Fund Shares under Rule 14.11(i) in Securities implemented written policies and procedures
1 15 U.S.C. 78s(b)(1). Exchange Act Release No. 78396 (July 22, 2016), 81 reasonably designed to prevent violation, by the
2 17 CFR 240.19b–4. FR 49698 (July 28, 2016) (SR–BATS–2015–100). Continued
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![Federal Register / Vol. 83, No. 5 / Monday, January 8, 2018 / Notices 935
through efficient and transparent business day. Pricing information will day, closing and settlement prices of
exchange-traded derivative products. be available on each Fund’s website Non-U.S. Component Stocks will be
In addition to improved convenience, including: (1) The prior business day’s readily available from automated
efficiency and transparency, the Funds reported NAV, the Bid/Ask Price of the quotation systems, published or other
will also help to prevent fraudulent and Fund, and a calculation of the premium public sources, or online information
manipulative acts and practices by and discount of the Bid/Ask Price services such as Bloomberg or Reuters.
enhancing the security afforded to against the NAV; and (2) data in chart Price information on Cash Equivalents
investors as compared to a direct format displaying the frequency and GSE Securities is available from
investment in bitcoin. Despite the distribution of discounts and premiums major broker-dealer firms or market data
extensive security mechanisms built of the daily Bid/Ask Price against the vendors, as well as from automated
into the Bitcoin Network, a remaining NAV, within appropriate ranges, for quotation systems, published or other
risk to owning bitcoin directly is the each of the four previous calendar public sources, or online information
need for the holder to retain and protect quarters. Additionally, information services.
the ‘‘private key’’ required to spend or regarding market price and trading of
sell bitcoin after purchase. If a holder’s The proposed rule change is designed
the Shares will be continually available to perfect the mechanism of a free and
private key is compromised or simply on a real-time basis throughout the day
lost, their bitcoin can be rendered open market and, in general, to protect
on brokers’ computer screens and other
unavailable—i.e., effectively lost to the investors and the public interest in that
electronic services, and quotation and
investor. This risk will be eliminated by it will facilitate the listing and trading
last sale information for the Shares will
the Long Bitcoin Fund because the of additional types of actively-managed
be available on the facilities of the CTA.
exposure to bitcoin is gained through exchange-traded product [sic] that will
The website for the Funds will include
cash-settled Listed Bitcoin Derivatives enhance competition among market
a form of the prospectus for the Funds
that do not present any of the security participants, to the benefit of investors
and additional data relating to NAV and
issues that exist with direct investment and the marketplace. As noted above,
other applicable quantitative
in bitcoin. the Exchange has in place surveillance
information. Trading in Shares of the
Additionally, the Funds may each procedures relating to trading in the
Funds will be halted under the
hold up to an aggregate amount of 15% conditions specified in BZX Rule 11.18. Shares and may obtain information via
of its net assets in illiquid assets Trading may also be halted because of ISG from other exchanges that are
(calculated at the time of investment). market conditions or for reasons that, in members of ISG or affiliated with a
Each Fund will monitor its portfolio the view of the Exchange, make trading member of ISG or with which the
liquidity on an ongoing basis to in the Shares inadvisable. Finally, Exchange has entered into a
determine whether, in light of current trading in the Shares will be subject to comprehensive surveillance sharing
circumstances, an adequate level of agreement as well as trade information
BZX Rule 14.11(i)(4)(B)(iv), which sets
liquidity is being maintained, and will for certain fixed income instruments as
forth circumstances under which the
consider taking appropriate steps in reported to FINRA’s TRACE. At least
Shares of each Fund may be halted. In
order to maintain adequate liquidity if, 90% of the weight of the Listed Bitcoin
addition, as noted above, investors will
through a change in values, net assets, Derivatives held by each Fund will
have ready access to information
or other circumstances, more than 15% consist of instruments that will trade on
regarding the Fund’s holdings, the
of the Fund’s net assets are held in markets that are a member of ISG or
Intraday Indicative Value, the Disclosed
illiquid assets. Illiquid assets include affiliated with a member of ISG or with
Portfolio, and quotation and last sale
assets subject to contractual or other which the Exchange has in place a
information for the Shares.
restrictions on resale and other comprehensive surveillance sharing
instruments that lack readily available Information regarding market price agreement. In addition, as noted above,
markets as determined in accordance and trading volume of the Shares will be investors will have ready access to
with Commission staff guidance. continually available on a real-time information regarding the Fund’s
The proposed rule change is designed basis throughout the day on brokers’ holdings, the Intraday Indicative Value,
to promote just and equitable principles computer screens and other electronic the Disclosed Portfolio, and quotation
of trade and to protect investors and the services, and quotation and last sale and last sale information for the Shares.
public interest in that the Exchange will information will be available via the
obtain a representation from the issuer CTA high-speed line. Quotation, intra- For the above reasons, the Exchange
of the Shares that the NAV will be day, closing and settlement prices of believes that the proposed rule change
calculated daily and that the NAV and Listed Bitcoin Derivatives will be is consistent with the requirements of
the Disclosed Portfolio will be made readily available from their respective Section 6(b)(5) of the Act.
available to all market participants at exchange or swap execution facility, as (B) Self-Regulatory Organization’s
the same time. In addition, a large applicable, as well as through Statement on Burden on Competition
amount of information is publicly automated quotation systems, published
available regarding the Funds and the or other public sources, or online The Exchange does not believe that
Shares, thereby promoting market information services such as Bloomberg the proposed rule change will impose
transparency. Moreover, the Intraday or Reuters. Quotation, intra-day, closing any burden on competition that is not
Indicative Value will be disseminated and settlement prices of U.S. exchange- necessary or appropriate in furtherance
by one or more major market data listed ETPs will be readily available of the purpose of the Act. The Exchange
vendors at least every 15 seconds during from the listing exchange, automated notes that the proposed rule change,
sradovich on DSK3GMQ082PROD with NOTICES
Regular Trading Hours. On each quotation systems, published or other rather will facilitate the listing and
business day, before commencement of public sources, or online information trading of additional actively-managed
trading in Shares during Regular services such as Bloomberg or Reuters. exchange-traded products that will
Trading Hours, each Fund will disclose Quotation information for OTC Bitcoin enhance competition among both
on its website the Disclosed Portfolio Derivatives may be obtained from market participants and listing venues,
that will form the basis for the Fund’s brokers and dealers who make markets to the benefit of investors and the
calculation of NAV at the end of the in such instruments. Quotation, intra- marketplace.
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![936 Federal Register / Vol. 83, No. 5 / Monday, January 8, 2018 / Notices
(C) Self-Regulatory Organization’s provisions of 5 U.S.C. 552, will be for at least two years; (2) any overhead
Statement on Comments on the available for website viewing and traffic on the Line can be rerouted over
Proposed Rule Change Received From printing in the Commission’s Public other lines; (3) no formal complaint
Members, Participants or Others Reference Room, 100 F Street NE, filed by a user of rail service on the Line
The Exchange has neither solicited Washington, DC 20549 on official (or by a state or local government entity
business days between the hours of acting on behalf of such user) regarding
nor received written comments on the
10:00 a.m. and 3:00 p.m. Copies of the cessation of service over the Line either
proposed rule change.
filing will also be available for is pending with the Surface
III. Date of Effectiveness of the inspection and copying at the principal Transportation Board (Board) or with
Proposed Rule Change and Timing for office of the Exchange. All comments any U.S. District Court or has been
Commission Action received will be posted without change. decided in favor of a complainant
Within 45 days of the date of Persons submitting comments are within the two-year period; and (4) the
publication of this notice in the Federal cautioned that we do not redact or edit requirements at 49 CFR 1105.7(c)
Register or within such longer period personal identifying information from (environmental report), 49 CFR 1105.12
up to 90 days (i) as the Commission may comment submissions. You should (newspaper publication), and 49 CFR
submit only information that you wish 1152.50(d)(1) (notice to governmental
designate if it finds such longer period
to make available publicly. All agencies) have been met.
to be appropriate and publishes its
submissions should refer to File As a condition to this exemption, any
reasons for so finding or (ii) as to which
Number SR–CboeBZX–2017–021 and employee adversely affected by the
the self-regulatory organization
should be submitted on or before abandonment shall be protected under
consents, the Commission will:
January 29, 2018. Oregon Short Line Railroad—
A. By order approve or disapprove the
proposed rule change, or For the Commission, by the Division of Abandonment Portion Goshen Branch
B. institute proceedings to determine Trading and Markets, pursuant to delegated Between Firth & Ammon, in Bingham &
authority.51 Bonneville Counties, Idaho, 360 I.C.C.
whether the proposed rule change
should be disapproved. Eduardo A. Aleman, 91 (1979). To address whether this
Assistant Secretary. condition adequately protects affected
IV. Solicitation of Comments [FR Doc. 2018–00077 Filed 1–5–18; 8:45 am] employees, a petition for partial
Interested persons are invited to BILLING CODE 8011–01–P revocation under 49 U.S.C. 10502(d)
submit written data, views, and must be filed.
arguments concerning the foregoing, Provided no formal expression of
including whether the proposed rule SURFACE TRANSPORTATION BOARD intent to file an offer of financial
change is consistent with the Act. assistance (OFA) has been received, this
[Docket No. AB 55 (Sub–No. 775X)] exemption will be effective on February
Comments may be submitted by any of
the following methods: 7, 2018, unless stayed pending
CSX Transportation, Inc.—
reconsideration. Petitions to stay that do
Electronic Comments Abandonment Exemption—in Clark,
not involve environmental issues,2
Floyd, Lawrence, Orange, &
• Use the Commission’s internet Washington Counties, Ind.
formal expressions of intent to file an
comment form (http://www.sec.gov/ OFA under 49 CFR 1152.27(c)(2),3 and
rules/sro.shtml); or CSX Transportation, Inc. (CSXT), has interim trail use/rail banking requests
• Send an email to rule-comments@ filed a verified notice of exemption under 49 CFR 1152.29 must be filed by
sec.gov. Please include File Number SR– under 49 CFR pt. 1152 subpart F– January 18, 2018. Petitions to reopen or
CboeBZX–2017–021 on the subject line. Exempt Abandonments to abandon an requests for public use conditions under
approximately 62.3-mile rail line on its 49 CFR 1152.28 must be filed by January
Paper Comments Northern Region, Louisville Division, 29, 2018, with the Surface
• Send paper comments in triplicate Hoosier Subdivision between milepost Transportation Board, 395 E Street SW,
to Secretary, Securities and Exchange 00Q 251.7, near Bedford, and milepost Washington, DC 20423–0001.
Commission, 100 F Street NE, 00Q 314.0, near New Albany, in Clark, A copy of any petition filed with the
Washington, DC 20549–1090. Floyd, Lawrence, Orange, and Board should be sent to Louis E.
All submissions should refer to File Washington Counties, Ind. (the Line). Gitomer, Law Offices of Louis E.
Number SR–CboeBZX–2017–021. This The Line traverses United States Postal Gitomer, LLC, 600 Baltimore Avenue,
file number should be included on the Service Zip Codes 47150, 47172, 47106, Suite 301, Towson, MD 21204.
subject line if email is used. To help the 47143, 47165, 47167, 47108, 47452, If the verified notice contains false or
Commission process and review your 47446, and 47421 and serves the misleading information, the exemption
comments more efficiently, please use stations of Orleans (milepost 00Q 262), is void ab initio.
only one method. The Commission will Leipsic (milepost 00Q 267),
post all comments on the Commission’s Campbellsburg (milepost 00Q 273), 2 The Board will grant a stay if an informed
internet website (http://www.sec.gov/ Salem (milepost 00Q 284), Pekin decision on environmental issues (whether raised
(milepost 00Q 295), and Borden by a party or by the Board’s Office of Environmental
rules/sro.shtml). Copies of the Analysis (OEA) in its independent investigation)
submission, all subsequent (milepost 00Q 300). CSXT was cannot be made before the exemption’s effective
amendments, all written statements previously granted authority to date. See Exemption of Out-of-Serv. Rail Lines, 5
with respect to the proposed rule discontinue service over the Line.1 I.C.C.2d 377 (1989). Any request for a stay should
sradovich on DSK3GMQ082PROD with NOTICES
CSXT has certified that: (1) No local be filed as soon as possible so that the Board may
change that are filed with the take appropriate action before the exemption’s
Commission, and all written freight traffic has moved over the Line effective date.
communications relating to the 3 Each OFA must be accompanied by the filing
51 17CFR 200.30–3(a)(12).
proposed rule change between the fee, which is currently set at $1,800. See
1 CSX Transp., Inc.—Discontinuance of Serv. Regulations Governing Fees for Servs. Performed in
Commission and any person, other than Exemption—in Clark, Floyd, Lawrence, Orange, & Connection with Licensing & Related Servs.—2017
those that may be withheld from the Wash. Ctys., Ind., AB 55 (Sub–No. 698X) (STB Update, EP 542 (Sub–No. 25), slip op. App. C at 20
public in accordance with the served Apr. 7, 2010). (STB served July 28, 2017).
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Document Created: 2018-01-06 02:32:09
Document Modified: 2018-01-06 02:32:09
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Notices | |
| FR Citation | 83 FR 929 |
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