
[Federal Register Volume 76, Number 6 (Monday, January 10, 2011)]
[Notices]
[Pages 1489-1491]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-161]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63635; File No. SR-NYSEArca-2010-103]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting 
Approval of Proposed Rule Change Relating to the Listing and Trading of 
the Jefferies S&P 500[supreg] VIX Short-Term Futures ETF

January 3, 2011.

I. Introduction

    On November 9, 2010, NYSE Arca, Inc. (``Exchange'') filed with the 
Securities and Exchange Commission (``Commission''), pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ 
and Rule 19b-4 thereunder,\2\ a proposed rule change to list and trade 
shares (``Shares'') of the Jefferies S&P 500[supreg] VIX Short-Term 
Futures ETF (``Fund'') of the ProShares Trust II (``Trust'') under NYSE 
Arca Equities Rule 8.200, Commentary .02. The proposed rule change was 
published for comment in the Federal Register on November 29, 2010.\3\ 
The Commission received no comments on the proposal. This order grants 
approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 63349 (November 19, 
2010), 75 FR 73145 (``Notice'').
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II. Description of the Proposal

    The Exchange proposes to list and trade the Shares of the Fund 
under NYSE Arca Equities Rule 8.200, Commentary .02.\4\ The Fund, which 
is a commodity pool and a Delaware statutory trust,\5\ seeks to track 
changes, whether positive or negative, in the level of the S&P 500 VIX 
Short-Term FuturesTM Index ER (``VIX Futures Index'' or 
``Index'') over time.\6\ The Fund will pursue its investment objective 
primarily by maintaining long futures positions corresponding to the 
futures contracts underlying the VIX Futures Index (``VIX Futures 
Contracts'') which trade on the CBOE Futures Exchange (``CFE''), with 
an aggregate notional amount equal to the Fund's total capital. In 
certain circumstances, as described below, the Fund may invest in one 
or more forward agreements or swaps (``Futures-Linked Investments''). 
The Fund is also intended to reflect the excess, if any, of its 
interest income from its investment in U.S. Treasury bills, generally 
with a maturity of less than one year, and other high credit quality 
short-term fixed-income securities, over its expenses.
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    \4\ Commentary .02 to NYSE Arca Equities Rule 8.200 applies to 
Trust Issued Receipts that invest in ``Financial Instruments.'' The 
term ``Financial Instruments,'' as defined in Commentary .02(b)(4) 
to NYSE Arca Equities Rule 8.200, means any combination of 
investments, including cash; securities; options on securities and 
indices; futures contracts; options on futures contracts; forward 
contracts; equity caps, collars and floors; and swap agreements.
    \5\ The Fund has filed a Pre-Effective Amendment No. 3 to its 
Registration Statement on Form S-1 under the Securities Act of 1933, 
dated August 17, 2010 (File No. 333-166283) (``Registration 
Statement'').
    \6\ The VIX Futures Index, which is the excess return version of 
the S&P 500 VIX Short-Term FuturesTM Index, was created 
by Standard & Poor's Financial Services, LLC (``Index Sponsor'').
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    Jefferies Commodity Investment Services, LLC, a Delaware limited 
liability company, is the Fund's promoter, and will serve as Managing 
Owner of the Fund. The Managing Owner will serve as the commodity pool 
operator and commodity trading advisor of the Fund. The Managing Owner 
is registered as a commodity pool operator and commodity trading 
advisor with the Commodity Futures Trading Commission and is a member 
of the National Futures Association. The Bank of New York Mellon 
(``Administrator'') will be the administrator, custodian and transfer 
agent of the Fund.
    The Index is designed to provide an exposure to one or more 
maturities of futures contracts on the CBOE Volatility Index 
(``Volatility Index''), which reflect implied volatility in the S&P 
500[supreg] Index at various points along the volatility forward 
curve.\7\ The Volatility Index is calculated based on the prices of put 
and call options on the S&P 500[supreg] Index. The VIX Futures Index is 
intended to reflect the returns that are potentially

[[Page 1490]]

available through an unleveraged investment in the relevant futures 
contract or contracts on the Volatility Index. The VIX Futures Index 
measures the return from a daily rolling long position in the first and 
second month VIX Futures Contracts, targeting a constant weighted 
average futures maturity of one month. The Fund will acquire and roll 
long positions in the first and second month VIX Futures Contracts with 
a view to tracking the level of the Index over time. The Fund will both 
roll and rebalance its holdings of VIX Futures Contracts in a manner 
consistent with the method described in the Registration Statement.
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    \7\ The Volatility Index is a benchmark index designed to 
estimate expected volatility in large cap U.S. stocks over 30 days 
in the future by averaging the weighted prices of certain put and 
call options on the S&P 500[supreg] Index. During periods of market 
instability, the implied level of volatility of the S&P 500[supreg] 
Index typically increases and, consequently, the prices of options 
linked to the S&P 500[supreg] Index typically increase (assuming all 
other relevant factors remain constant or have negligible changes). 
This, in turn, causes the level of the Volatility Index to increase. 
Because the Volatility Index may increase in times of uncertainty, 
the Volatility Index is commonly known as the ``fear gauge'' of the 
broad U.S. equities market. The Volatility Index has historically 
had negative correlations to the S&P 500[supreg] Index. The Exchange 
states that the Fund is not linked to the Volatility Index, and the 
value of the Index and the Shares may diverge significantly from the 
Volatility Index.
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    As stated earlier, the Fund seeks to achieve its investment 
objective by investing under normal market conditions in VIX Futures 
Contracts. In the event the Fund reaches its position accountability 
rules with respect to VIX Futures Contracts, the Managing Owner, may, 
in its commercially reasonable judgment, cause the Fund to invest in a 
Futures-Linked Investment referencing the particular VIX Futures 
Contracts, or invest in other futures contracts or a Futures-Linked 
Investment not based on the particular VIX Futures Contracts if such 
instruments tend to exhibit trading prices or returns that correlate 
with the VIX Futures Index or any VIX Futures Contract and will further 
the investment objective of the Fund.\8\ The Fund may also invest in 
Futures-Linked Investments if the market for a specific futures 
contract experiences emergencies (e.g., natural disaster, terrorist 
attack or an act of God) or disruptions (e.g., a trading halt or a 
flash crash) to prevent the Fund from obtaining the appropriate amount 
of investment exposure to the affected VIX Futures Contract directly or 
other futures contract.\9\
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    \8\ To the extent practicable, the Fund will invest in swaps 
cleared through the facilities of a centralized clearing house.
    \9\ The Managing Owner will also attempt to mitigate the Fund's 
credit risk by transacting only with large, well-capitalized 
institutions using measures designed to determine the 
creditworthiness of a counterparty. The Managing Owner will take 
various steps to limit counterparty credit risk, as described in the 
Registration Statement.
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    The Fund does not intend to outperform the Index and is not 
``managed'' by traditional methods, which typically involve effecting 
changes in the composition of the Fund's portfolio on the basis of 
judgments relating to economic, financial, and market considerations 
with a view to obtaining positive results under all market conditions. 
The Managing Owner will seek to cause the net asset value (``NAV'') of 
the Fund to track the Index during periods in which the Index is flat 
or declining as well as when the Index is rising.
    Additional information regarding the Fund and the Shares, the VIX 
Futures Index and underlying VIX Futures Contracts, the Volatility 
Index, investment strategies, risks, creation and redemption 
procedures, fees, portfolio holdings and disclosure policies, 
distributions and taxes, availability of information, trading rules and 
halts, and surveillance procedures, among other things, can be found in 
the Registration Statement and in the Notice, as applicable.\10\
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    \10\ See Notice and Registration Statement, supra notes 3 and 5.
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III. Discussion and Commission's Findings

    The Commission has carefully reviewed the proposed rule change and 
finds that it is consistent with the requirements of Section 6 of the 
Act \11\ and the rules and regulations thereunder applicable to a 
national securities exchange.\12\ In particular, the Commission finds 
that the proposal is consistent with Section 6(b)(5) of the Act,\13\ 
which requires, among other things, that the Exchange's rules be 
designed to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest. The Commission notes that the Shares must comply with 
the requirements of NYSE Arca Equities Rule 8.200, Commentary .02 to be 
listed and traded on the Exchange.
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    \11\ 15 U.S.C. 78f.
    \12\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \13\ 17 U.S.C. 78f(b)(5).
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    The Commission finds that the proposal to list and trade the Shares 
on the Exchange is consistent with Section 11A(a)(1)(C)(iii) of the 
Act,\14\ which sets forth Congress' finding that it is in the public 
interest and appropriate for the protection of investors and the 
maintenance of fair and orderly markets to assure the availability to 
brokers, dealers, and investors of information with respect to 
quotations for and transactions in securities. Quotation and last-sale 
information regarding the Shares will be disseminated through the 
facilities of the Consolidated Tape Association. In addition, the Index 
Sponsor will publish the intra-day level of the VIX Futures Index 
updated every 15 seconds during the NYSE Arca Core Trading Session of 
9:30 a.m. to 4 p.m. Eastern Time (``ET'') on the consolidated tape, 
Reuters and/or Bloomberg. The Index Sponsor will also publish the daily 
closing level of the VIX Futures Index as of the close of the NYSE Arca 
Core Trading Session.\15\ The level of the Volatility Index as 
calculated by CBOE, updated every 15 seconds from 9:30 a.m. to 4:15 
p.m. ET, is disseminated on the CBOE Web site at http://www.cboe.com 
and through major market data vendors. An updated Indicative Trust 
Value (``ITV'') will be calculated using the prior day's closing NAV 
per share of the Fund as a base and updating that value throughout the 
NYSE Arca Core Trading Session each trading day to reflect current 
changes in the value of VIX Futures Contracts held by the Fund, as well 
as the value of any swap or forward contracts and other futures 
contracts held by the Fund. The ITV will be disseminated on a per-
Shares basis by one or more major market data vendors every 15 seconds. 
Further, the Fund will provide Web site disclosure of portfolio 
holdings daily and will include, as applicable, the names and value (in 
U.S. dollars) of VIX Futures Contracts, Futures-Linked Investments, and 
other futures contracts, if any, and characteristics of such 
investments and cash equivalents, and amount of cash held in the 
portfolio of the Fund. The closing prices and settlement prices of VIX 
Futures Contracts are available from the Web sites of the CFE, 
automated quotation systems, published or other public sources, and on-
line information services such as Bloomberg or Reuters.\16\ The 
specific contract specifications for VIX Futures Contracts are also 
available on those Web sites, as well as on other financial 
informational sources. The CFE also provides delayed futures 
information on current and past trading sessions and market news free 
of charge on its Web site. The NAV for the Fund will be calculated by 
the Administrator once a day at or after 4:15 p.m. ET and will be 
disseminated to all market participants at the same time. The Exchange 
will make available on its Web site daily trading volume of the Shares, 
closing prices of the Shares, and number of Shares outstanding.
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    \14\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \15\ The Fund's Web site will display the end-of-day closing 
Index levels and NAV.
    \16\ Complete real-time data for VIX Futures Contracts is 
available by subscription from Reuters and Bloomberg.
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    The Commission further believes that the proposal to list and trade 
the Shares is reasonably designed to promote fair disclosure of 
information that may be necessary to price the Shares

[[Page 1491]]

appropriately and to prevent trading when a reasonable degree of 
transparency cannot be assured. The Commission notes that the Web site 
disclosure of the portfolio composition of the Fund will occur at the 
same time as the disclosure by the Managing Owner of the portfolio 
composition to Authorized Participants so that all market participants 
are provided portfolio composition information at the same time. In 
addition, if the Exchange becomes aware that the NAV with respect to 
the Shares is not disseminated to all market participants at the same 
time, the Exchange will halt trading in the Shares until such time as 
the NAV is available to all market participants. Further, the Exchange 
may halt trading during the day in which an interruption to the 
dissemination to the ITV, the VIX Futures Index, the Volatility Index, 
or the value of the underlying futures contracts occurs. If such 
interruption persists past the trading day in which it occurred, the 
Exchange will halt trading no later than the beginning of the trading 
day following the interruption.\17\ Trading in the Shares will be 
subject to NYSE Arca Equities Rule 8.200, Commentary .02(e), which sets 
forth certain restrictions on ETP Holders acting as registered Market 
Makers in Trust Issued Receipts to facilitate surveillance. The 
Exchange represents that the Index Sponsor has implemented procedures 
designed to prevent the use and dissemination of material, non-public 
information regarding the Index.
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    \17\ 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. These may include: (1) The extent to which 
trading is not occurring in the underlying futures contracts; or (2) 
whether other unusual conditions or circumstances detrimental to the 
maintenance of a fair and orderly market are present.
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    The Exchange has represented that the Shares are deemed to be 
equity securities subject to the Exchange's existing rules governing 
the trading of equity securities. In support of this proposal, the 
Exchange has made representations, including:
    (1) The Fund will meet the initial and continued listing 
requirements applicable to Trust Issued Receipts in NYSE Arca Equities 
Rule 8.200 and Commentary .02 thereto.
    (2) The Exchange has appropriate rules to facilitate transactions 
in the Shares during all trading sessions.
    (3) The Exchange's surveillance procedures are adequate to properly 
monitor Exchange trading of the Shares in all trading sessions and to 
deter and detect violations of Exchange rules and applicable Federal 
securities laws. In addition, with respect to Fund components traded on 
exchanges, not more than 10% of the weight of such components in the 
aggregate will consist of components whose principal trading market is 
not a member of the Intermarket Surveillance Group or is a market with 
which the Exchange does not have a comprehensive surveillance sharing 
agreement.
    (4) Prior to the commencement of trading, the Exchange will inform 
its ETP Holders in an Information Bulletin of the special 
characteristics and risks associated with trading the Shares. 
Specifically, the Information Bulletin will discuss the following: (a) 
The risks involved in trading the Shares during the Opening and Late 
Trading Sessions when an updated ITV will not be calculated or publicly 
disseminated; (b) the procedures for purchases and redemptions of 
Shares in Creation Baskets and Redemption Baskets (and that Shares are 
not individually redeemable); (c) NYSE Arca Equities Rule 9.2(a), which 
imposes a duty of due diligence on its ETP Holders to learn the 
essential facts relating to every customer prior to trading the Shares; 
(d) how information regarding the ITV is disseminated; (e) the 
requirement that ETP Holders deliver a prospectus to investors 
purchasing newly issued Shares prior to or concurrently with the 
confirmation of a transaction; and (f) trading information.
    (5) With respect to the application of Rule 10A-3 under the 
Act,\18\ the Trust relies on the exception contained in Rule 10A-
3(c)(7).\19\
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    \18\ 17 CFR 240.10A-3.
    \19\ 17 CFR 240.10A-3(c)(7).
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    (6) A minimum of 100,000 Shares of the Fund will be outstanding as 
of the start of trading on the Exchange.
    This approval order is based on the Exchange's representations.\20\
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    \20\ The Commission notes that it does not regulate the market 
for futures in which the Fund plans to take positions, which is the 
responsibility of the CFTC. The CFTC has the authority to set limits 
on the positions that any person may take in futures. These limits 
may be directly set by the CFTC, or by the markets on which the 
futures are traded. The Commission has no role in establishing 
position limits on futures, even though such limits could impact an 
exchange-traded product that is under the jurisdiction of the 
Commission.
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    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act \21\ and the 
rules and regulations thereunder applicable to a national securities 
exchange.
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    \21\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\22\ that the proposed rule change (SR-NYSEArca-2010-103), be, and 
it hereby is, approved.
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    \22\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-161 Filed 1-7-11; 8:45 am]
BILLING CODE 8011-01-P


