
[Federal Register Volume 76, Number 95 (Tuesday, May 17, 2011)]
[Notices]
[Pages 28493-28498]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-12017]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64470; File No. SR-NYSEArca-2011-23]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Proposed Rule Change To List and Trade Shares of ProShares Short VIX 
Short-Term Futures ETF, ProShares Short VIX Mid-Term Futures ETF, 
ProShares Ultra VIX Short-Term Futures ETF, ProShares Ultra VIX Mid-
Term Futures ETF, ProShares UltraShort VIX Short-Term Futures ETF, and 
ProShares UltraShort VIX Mid-Term Futures ETF Under NYSE Arca Equities 
Rule 8.200, Commentary .02

May 11, 2011.
    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 April 28, 2011, NYSE Arca, Inc. (the ``Exchange'' or ``NYSE 
Arca'') filed with the Securities and Exchange Commission (the 
``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.
---------------------------------------------------------------------------

    \11\ 17 CFR 200.30-3(a)(12).
    \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 proposes to list and trade shares of ProShares Short 
VIX Short-Term Futures ETF, ProShares Short VIX Mid-Term Futures ETF, 
ProShares Ultra VIX Short-Term Futures ETF, ProShares Ultra VIX Mid-
Term Futures ETF, ProShares UltraShort VIX Short-Term Futures ETF, and 
ProShares UltraShort VIX Mid-Term Futures ETF under NYSE Arca Equities 
Rule 8.200, Commentary .02. The text of the proposed rule change is 
available at the Exchange, the Commission's Public Reference Room, and 
http://www.nyse.com.

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 self-regulatory organization 
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 those 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    NYSE Arca Equities Rule 8.200, Commentary .02 permits the trading 
of Trust Issued Receipts (``TIRs'') either by listing or pursuant to 
unlisted trading privileges (``UTP'').\3\ The Exchange proposes to list 
and trade shares (``Shares'') of ProShares Short VIX Short-Term Futures 
ETF, ProShares Short VIX Mid-Term Futures ETF (the ``Short Funds''), 
ProShares Ultra VIX Short-Term Futures ETF, ProShares Ultra VIX Mid-
Term Futures ETF (the ``Ultra Funds''), ProShares UltraShort VIX Short-
Term Futures ETF, and ProShares UltraShort VIX Mid-Term Futures ETF 
(the ``UltraShort Funds'' and, together with the Short and Ultra Funds, 
the ``Funds'') under NYSE Arca Equities Rule 8.200, Commentary .02.\4\ 
The Funds seek, on a daily basis, to provide investment results (before 
fees and expenses) that correspond to the inverse of the daily 
performance, a multiple of the daily performance or an inverse multiple 
of the daily performance of a benchmark that seeks to offer exposure to 
market volatility through publicly traded futures markets. The 
benchmark for ProShares Short VIX Short-Term Futures ETF, ProShares 
Ultra VIX Short-Term Futures ETF, and ProShares UltraShort VIX Short-
Term Futures ETF is the S&P 500 VIX Short-Term Futures Index, and the 
benchmark for ProShares Short VIX Mid-Term Futures ETF, ProShares Ultra 
VIX Mid-Term Futures ETF, and ProShares UltraShort VIX Mid-Term Futures 
ETF is the S&P 500 VIX Mid-Term Futures Index (each, an ``Index,'' and, 
collectively, the ``Indexes'').\5\ The Funds will take long (in the 
case of the Ultra Funds) and short (in the case of the Short and 
UltraShort Funds) positions in futures contracts based on the Chicago 
Board Options Exchange (``CBOE'') Volatility Index (``VIX'') and, under 
limited circumstances, swap agreements (as further described herein), 
to pursue their respective investment objectives. Each Fund also may 
invest in cash or cash equivalents such as U.S. Treasury securities or 
other high credit quality short-term fixed-income or similar securities 
(including shares of money market funds, bank deposits, bank money 
market accounts, certain variable rate-demand notes and repurchase 
agreements collateralized by government securities) that may serve as 
collateral for the futures contracts and swap agreements.
---------------------------------------------------------------------------

    \3\ Commentary .02 to NYSE Arca Equities Rule 8.200 applies to 
TIRs 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.
    \4\ The Commission previously has approved listing on the 
Exchange under Commentary .02 to NYSE Arca Equities Rule 8.200 of 
certain securities issuers. See, e.g., Securities Exchange Act 
Release Nos. 58457 (September 3, 2008), 73 FR 52711 (September 10, 
2008) (SR-NYSEArca-2008-91) (order granting accelerated approval to 
list on NYSE Arca of 14 ProShares funds); 63610 (December 27, 2010), 
76 FR 199 (January 3, 2011) (SR-NYSEArca-2010-101) (order approving 
listing and trading of the ProShares VIX Short-Term Futures ETF and 
the ProShares VIX Mid-Term Futures ETF). See also Securities 
Exchange Act Release No. 58968 (November 17, 2008), 73 FR 71082 
(November 24, 2008) (SR-NYSEArca-2008-111) (order granting 
accelerated approval of proposed rule change to amend NYSE Arca 
Equities Rule 5.2(j)(6)(v) to add CBOE Volatility Index (VIX) 
Futures to the definition of Futures Reference Asset).
    \5\ Standard & Poor's Financial Services LLC, the index sponsor 
with respect to the Indexes, is not a broker-dealer and has 
implemented procedures designed to prevent the use and dissemination 
of material, non-public information regarding the Indexes.
---------------------------------------------------------------------------

    Each Fund acquires exposure through VIX futures contracts traded on 
the CBOE Futures Exchange (``CFE'') (``VIX Futures Contracts'') such 
that each Fund has exposure intended to approximate the inverse of the 
daily performance, a multiple of the daily performance or an inverse 
multiple of the daily performance of its respective Index at the time 
of the net asset value (``NAV'') calculation.\6\
---------------------------------------------------------------------------

    \6\ Terms relating to the Funds, the Shares and the Indexes 
referred to, but not defined, herein are defined in the Registration 
Statement.
---------------------------------------------------------------------------

    ProShare Capital Management LLC (``Sponsor''), a Maryland limited 
liability company, serves as the Sponsor of ProShares Trust II (the 
``Trust''). The Sponsor is a commodity pool operator and commodity 
trading advisor.\7\ Brown

[[Page 28494]]

Brothers Harriman & Co. serves as the administrator (the 
``Administrator''), custodian and transfer agent of the Funds and their 
respective Shares. SEI Investments Distribution Co. (``Distributor'') 
serves as Distributor of the Shares. Wilmington Trust Company, a 
Delaware banking corporation, is the sole trustee of the Trust.
---------------------------------------------------------------------------

    \7\ The Funds have filed a registration statement on Form S-3 
under the Securities Act of 1933. See Post-Effective Amendment No. 4 
dated April 13, 2011 (File No. 333-163511) to the Trust's 
Registration Statement on Form S-3 (``Registration Statement''). The 
description of the Funds and the Shares contained herein are based 
on the Registration Statement.
---------------------------------------------------------------------------

    According to the Registration Statement, each Fund seeks to achieve 
its investment objective by investing under normal market conditions in 
VIX Futures Contracts.\8\ In the event position accountability rules 
are reached with respect to VIX Futures Contracts, the Sponsor, may, in 
its commercially reasonable judgment, cause such Fund to obtain 
exposure through swaps referencing the relevant Index or particular VIX 
Futures Contracts, or invest in other futures contracts or swaps not 
based on the particular VIX Futures Contracts if such instruments tend 
to exhibit trading prices or returns that correlate with the Indexes or 
any VIX Futures Contract and will further the investment objective of 
such Fund.\9\ The Funds may also invest in swaps 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) that prevent a Fund from obtaining the 
appropriate amount of investment exposure to the affected VIX Futures 
Contracts directly or to other futures contracts.\10\
---------------------------------------------------------------------------

    \8\ The term ``under normal conditions'' includes, but is not 
limited to, the absence of extreme volatility or trading halts in 
the futures markets or the financial markets generally; operational 
issues causing dissemination of inaccurate market information; or 
force majeure type events such as systems failure, natural or man-
made disaster, act of God, armed conflict, act of terrorism, riot or 
labor disruption or any similar intervening circumstance.
    \9\ To the extent practicable, the Funds will invest in swaps 
cleared through the facilities of a centralized clearing house.
    \10\ According to the Registration Statement, the Sponsor will 
also attempt to mitigate the Funds' credit risk by transacting only 
with large, well-capitalized institutions using measures designed to 
determine the creditworthiness of a counterparty. The Sponsor will 
take various steps to limit counterparty credit risk, as described 
in the Registration Statement.
---------------------------------------------------------------------------

    According to the Registration Statement, if the Short Funds are 
successful in meeting their objectives, their values (before fees and 
expenses) should gain approximately as much on a percentage basis as 
their respective Index when it declines on a given day. Conversely, 
their values (before fees and expenses) should lose approximately as 
much on a percentage basis as their respective Index when it rises on a 
given day.
    If the Ultra Funds are successful in meeting their objectives, 
their values (before fees and expenses) should gain approximately twice 
as much on a percentage basis as their respective Index when it rises 
on a given day. Conversely, their values (before fees and expenses) 
should lose approximately twice as much on a percentage basis as their 
respective Index when it declines on a given day.
    If the UltraShort Funds are successful in meeting their objectives, 
their values (before fees and expenses) should gain approximately twice 
as much on a percentage basis as their respective Index when it 
declines on a given day. Conversely, their values (before fees and 
expenses) should lose approximately twice as much on a percentage basis 
as their respective Index when it rises on a given day.
    Each of the Funds uses investment techniques that include the use 
of any one or a combination of VIX Futures Contracts and may, if 
applicable, include swap agreements. The Funds' investment techniques 
may involve a small investment relative to the amount of investment 
exposure assumed and may result in losses exceeding the amounts 
invested. Such techniques, particularly when used to create leverage, 
may expose the Funds to potentially dramatic changes (losses or gains) 
in the value of their investments and imperfect correlation between the 
value of the investments and the security or Index.
    The Funds do not seek to achieve their stated investment objective 
over a period of time greater than one day because mathematical 
compounding prevents the Funds from perfectly achieving such results. 
Accordingly, results over periods of time greater than one day 
typically will not be a simple inverse correlation (-100%), multiple 
correlation (+200%) or multiple inverse correlation (-200%) of the 
period return of the corresponding Index and may differ significantly.
    According to the Registration Statement, each Fund is not actively 
managed by traditional methods, which typically involve effecting 
changes in the composition of a portfolio on the basis of judgments 
relating to economic, financial and market considerations with a view 
toward obtaining positive results under all market conditions. Rather, 
the Sponsor seeks to cause the NAV to track the inverse of the daily 
performance, a multiple of the daily performance or an inverse multiple 
of the daily performance of an Index even during periods in which that 
benchmark is flat or moving in a manner which causes the NAV of a Fund 
to decline.
    In seeking to achieve each Fund's investment objective, the Sponsor 
uses a mathematical approach to investing. Using this approach, the 
Sponsor determines the type, quantity and mix of investment positions 
that the Sponsor believes in combination should produce returns 
consistent with such Fund's objective. The Sponsor relies upon a pre-
determined model to generate orders that result in repositioning the 
Funds' investments in accordance with their respective investment 
objectives.
VIX Futures Contracts
    The Indexes are comprised of, and the value of the Funds will be 
based on, VIX Futures Contracts. VIX Futures Contracts are measures of 
the market's expectation of the level of VIX at certain points in the 
future, and as such will behave differently than current or spot VIX 
values.\11\ The Funds are not linked to the VIX, and in many cases the 
Indexes, and by extension the Funds, could significantly underperform 
or outperform the VIX.
---------------------------------------------------------------------------

    \11\ VIX is the ticker symbol for the CBOE Volatility Index, a 
popular measure of implied volatility. According to the Registration 
Statement, the goal of the VIX is to estimate the implied volatility 
of the S&P 500 over the next 30 days. A relatively high level of the 
VIX corresponds to a more volatile U.S. equity market as expressed 
by more costly options on the S&P 500 Index. The VIX represents one 
measure of the market's expectation of the volatility over the next 
30 day period. It is a composite value of options on the S&P 500 
Index. The formula used to calculate the composite value utilizes 
current market prices for a series of out-of-the-money calls and 
puts for the front month and second month expirations.
---------------------------------------------------------------------------

    While the VIX represents a measure of the current expected 
volatility of the S&P 500 over the next 30 days, the prices of VIX 
Futures Contracts are based on the current expectation of what the 
expected 30-day volatility will be at a particular time in the future 
(on the expiration date). To illustrate, on January 31, 2011, the VIX 
was 19.53 and the price of the February 2011 VIX Futures Contracts 
expiring on February 16, 2011 was 19.10. In this example, the price of 
the VIX represented the 30-day implied, or ``spot,'' volatility (the 
volatility expected for the period from January 31 to March 2, 2011) of 
the S&P 500, and the February VIX futures represented forward implied 
volatility (the volatility expected for the period from February 16, 
2011 to March 16, 2011) of the S&P 500.\12\ The VIX Futures

[[Page 28495]]

Contracts trade from 8:20 a.m. Eastern Time (``E.T.'') to 4:15 p.m. 
E.T.
---------------------------------------------------------------------------

    \12\ As of January 31, 2011, there was VIX Futures Contracts 
open interest on CFE of 163,396 contracts with a value of open 
interest of $3,461,984,900. Total CFE trading volume in 2010 in VIX 
Futures Contracts was 4,402,616 contracts, with average daily volume 
of 17,741 contracts. Total volume year-to-date (through January 31, 
2011) is 779,493 contracts, with average daily volume of 38,975 
contracts. (Source: Bloomberg and CBOE).
---------------------------------------------------------------------------

The S&P 500 VIX Short-Term Futures Index and S&P 500 VIX Mid-Term 
Futures Index
    According to the Registration Statement, the Indexes act as a 
measure of volatility as reflected by the price of certain VIX Futures 
Contracts (the ``Index Components''), with the price of each VIX 
Futures Contract reflecting the market's expectation of future 
volatility. Each Index seeks to reflect the returns that are 
potentially available from holding an unleveraged long position in 
certain VIX Futures Contracts.
    Unlike the Indexes, the VIX, which is not a benchmark for any Fund, 
is calculated based on the prices of put and call options on the S&P 
500, which are traded on the CBOE.
    The S&P 500 VIX Short-Term Futures Index employs rules for 
selecting the Index Components and a formula to calculate a level for 
the Index from the prices of these components. Specifically, the Index 
Components represent the prices of the two near-term VIX futures 
months, replicating a position that rolls the nearest month VIX Futures 
Contract to the next month VIX Futures Contract on a daily basis in 
equal fractional amounts. This results in a constant weighted average 
maturity of one month. The roll period begins on the Tuesday prior to 
the monthly CFE VIX Futures Contracts settlement date and runs through 
the Tuesday prior to the subsequent month's CFE VIX Futures Contract 
settlement date.
    The S&P 500 VIX Mid-Term Futures Index also employs rules for 
selecting the Index Components and a formula to calculate the level of 
the Index from the prices of these components. Specifically, the Index 
Components represent the prices for four contract months of VIX Futures 
Contracts, representing a market-based estimation of constant maturity, 
five month forward implied VIX values. The S&P 500 VIX Mid-Term Futures 
Index measures the return from a rolling long position in the fourth, 
fifth, sixth and seventh month VIX Futures Contracts, and rolls 
continuously throughout each month while maintaining positions in the 
fifth and sixth month contracts. This results in a constant weighted 
average maturity of five months.
Calculation of the Indexes
    The level of each Index is calculated in accordance with the method 
described in the Registration Statement. The level of each Index will 
be published at least every 15 seconds both in real time from 9:30 a.m. 
to 4:15 p.m. E.T. and at the close of trading on each Business Day by 
Bloomberg L.P. and Reuters.\13\
---------------------------------------------------------------------------

    \13\ A ``Business Day'' means any day other than a day when any 
of the NYSE, the NYSE Arca, the CBOE, or the CFE or other exchange 
material to the valuation or operation of the Funds, or the 
calculation of the VIX, options contracts underlying the VIX, VIX 
Futures Contracts or the Indexes is closed for trading.
---------------------------------------------------------------------------

    The Index Components comprising each Index represent the prices of 
certain futures contracts on the VIX. Each Index takes a daily rolling 
long position in contracts of specified maturities and is intended to 
reflect the returns that are potentially available through an 
unleveraged investment in those contracts. The S&P 500 VIX Short-Term 
Futures Index measures the return from a rolling long position in the 
first and second month VIX Futures Contracts. The Index rolls 
continuously throughout each month from the first month VIX Futures 
Contract into the second month VIX Futures Contract. The S&P 500 VIX 
Mid-Term Futures Index measures the return from a rolling long position 
in the fourth, fifth, sixth and seventh month VIX Futures Contracts. 
The Index rolls continuously throughout each month from the fourth 
month contract into the seventh month contract while maintaining 
positions in the fifth month and sixth month contracts.
    The Indexes roll on a daily basis. According to the Registration 
Statement, one of the effects of daily rolling is to maintain a 
constant weighted average maturity for the underlying futures 
contracts. Unlike equities, which typically entitle the holder to a 
continuing stake in a corporation, futures contracts normally specify a 
certain date for the delivery of the underlying asset or financial 
instrument or, in the case of futures contracts relating to indices 
such as the VIX, a certain date for payment in cash of an amount 
determined by the level of the underlying index. The Indexes operate by 
selling, on a daily basis, Index Components with a nearby settlement 
date and purchasing Index Components with a longer-dated settlement 
date. The roll for each contract occurs on each Business Day according 
to a pre-determined schedule that has the effect of keeping constant 
the weighted average maturity of the relevant Index Components. This 
process is known as ``rolling'' a futures position, and each Index is a 
``rolling index.'' The constant weighted average maturity for the 
futures underlying the S&P 500 VIX Short-Term Futures Index is one 
month and for the futures underlying the S&P 500 VIX Mid-Term Futures 
Index, five months.
    Because the Indexes incorporate this process of rolling futures 
positions on a daily basis, and the Funds, in general, also roll their 
positions on a daily basis, the daily roll is not anticipated to be a 
significant source of tracking error between a Fund and its respective 
Index. The Indexes are based on VIX Futures Contracts and not the VIX, 
and as such neither the Funds nor the Indexes are expected to track the 
VIX.
Purchases and Redemptions of Creation Units
    The Funds will create and redeem Shares from time to time in one or 
more Creation Units. A Creation Unit is a block of 50,000 Shares. 
Except when aggregated in Creation Units, the Shares are not redeemable 
securities.
    On any Business Day, an Authorized Participant may place an order 
with the Distributor to create one or more Creation Units.\14\ The 
total cash payment required to create each Creation Unit is the NAV of 
50,000 Shares of each Fund on the purchase order date plus the 
applicable transaction fee.
---------------------------------------------------------------------------

    \14\ Authorized Participants have a cut-off time of 12 p.m. E.T. 
to place creation and redemption orders.
---------------------------------------------------------------------------

    The procedures by which an Authorized Participant can redeem one or 
more Creation Units mirror the procedures for the purchase of Creation 
Units. On any Business Day, an Authorized Participant may place an 
order with the Distributor to redeem one or more Creation Units. The 
redemption proceeds from a Fund consist of the cash redemption amount. 
The cash redemption amount is equal to the NAV of the number of 
Creation Unit(s) of a Fund requested in the Authorized Participant's 
redemption order as of the time of the calculation of a Fund's NAV on 
the redemption order date, less transaction fees.
Availability of Information Regarding the Shares
    The NAV for the Funds' Shares will be calculated by the 
Administrator once a day and will be disseminated daily to all market 
participants at the same time.\15\ The Exchange will make

[[Page 28496]]

available on its Web site daily trading volume of each of the Shares, 
closing prices of such Shares, and number of Shares outstanding.
---------------------------------------------------------------------------

    \15\ According to the Registration Statement, NAV means the 
total assets of the Funds including, but not limited to, all cash 
and cash equivalents or other debt securities less total liabilities 
of the Funds, each determined on the basis of generally accepted 
accounting principles in the United States, consistently applied 
under the accrual method of accounting. Each Fund's NAV is 
calculated at 4:15 p.m. E.T.
---------------------------------------------------------------------------

    The intra-day, closing and settlement prices of the Index 
Components are also readily available from the Web sites of the CFE 
(http://www.cfe.cboe.com), automated quotation systems, published or 
other public sources, or on-line information services such as Bloomberg 
or Reuters. Complete real-time data for component futures underlying 
the Indexes is available by subscription from Reuters and Bloomberg. 
The CFE also provides delayed futures information on current and past 
trading sessions and market news free of charge on its Web site. The 
specific contract specifications for component futures underlying the 
Indexes are also available on such Web sites, as well as other 
financial informational sources. Quotation and last-sale information 
regarding the Shares will be disseminated through the facilities of the 
Consolidated Tape Association (``CTA''). In addition, the Funds' Web 
site at http://www.proshares.com will display the end of day closing 
Index levels and NAV.
    The Funds will provide Web site disclosure of portfolio holdings 
daily and will include, as applicable, the notional value (in U.S. 
dollars) of VIX Futures Contracts, other financial instruments, if any, 
cash equivalents, and amount of cash held in the portfolio of the 
Funds. This Web site disclosure of the portfolio composition of the 
Funds will occur at the same time as the disclosure by the Funds of the 
portfolio composition to Authorized Participants so that all market 
participants are provided portfolio composition information at the same 
time. Therefore, the same portfolio information will be provided on the 
public Web site as well as in electronic files provided to Authorized 
Participants. Accordingly, each investor will have access to the 
current portfolio composition of the Funds through the Funds' Web site.
    In addition, in order to provide updated information relating to 
the Funds for use by investors and market professionals, an updated 
Indicative Optimized Portfolio Value (``IOPV'') will be calculated. The 
IOPV is an indicator of the value of the VIX Futures Contracts and cash 
and/or cash equivalents less liabilities of a Fund at the time the IOPV 
is disseminated. NYSE Arca will calculate and disseminate every 15 
seconds throughout the NYSE Arca Core Trading Session (9:30 a.m. to 4 
p.m. E.T.) an updated IOPV. The IOPV will be calculated by the NYSE 
Arca using the prior day's closing net assets of a Fund as a base and 
updating throughout the trading day changes in the value of such Fund's 
holdings.
    The IOPV is published on the NYSE Arca's Web site and is available 
through on-line information services such as Bloomberg and Reuters.
    The IOPV disseminated during the Core Trading Session should not be 
viewed as an actual real time update of the NAV, which is calculated 
only once a day. The IOPV also should not be viewed as a precise value 
of the Shares.
    The Exchange believes that dissemination of the IOPV provides 
additional information regarding the Funds that is not otherwise 
available to the public and is useful to professionals and investors in 
connection with the related Shares trading on the Exchange or the 
creation or redemption of such Shares.
    Additional information regarding the Funds and the Shares, 
including investment strategies, risks, creation and redemption 
procedures, fees, portfolio holdings disclosure policies, distributions 
and taxes is included in the Registration Statement.
Trading Rules
    The Exchange deems the Shares to be equity securities, thus 
rendering trading in the Shares subject to the Exchange's existing 
rules governing the trading of equity securities. Shares will trade on 
the NYSE Arca Marketplace from 4 a.m. to 8 p.m. E.T. The Exchange has 
appropriate rules to facilitate transactions in the Shares during all 
trading sessions. As provided in NYSE Arca Equities Rule 7.6, 
Commentary .03, the minimum price variation (``MPV'') for quoting and 
entry of orders in equity securities traded on the NYSE Arca 
Marketplace is $0.01, with the exception of securities that are priced 
less than $1.00 for which the MPV for order entry is $0.0001.
    The trading of 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 TIRs to facilitate 
surveillance. See ``Surveillance'' below for more information.
    With respect to trading halts, the Exchange may consider all 
relevant factors in exercising its discretion to halt or suspend 
trading in the Shares. Trading may 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. In addition, 
trading in Shares will be subject to trading halts caused by 
extraordinary market volatility pursuant to the Exchange's ``circuit 
breaker'' rule \16\ or by the halt or suspension of trading of the 
underlying futures contracts.
---------------------------------------------------------------------------

    \16\ See NYSE Arca Equities Rule 7.12.
---------------------------------------------------------------------------

    The Exchange represents that the Exchange may halt trading during 
the day in which an interruption to the dissemination of the IOPV, the 
value of an Index, the VIX or the value of the underlying VIX Futures 
Contracts occurs. If an interruption to the dissemination of the IOPV, 
the value of an Index, the VIX or the value of the underlying VIX 
Futures Contracts 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. 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, it will halt 
trading in the Shares until such time as the NAV is available to all 
market participants.
    The Funds will meet the initial and continued listing requirements 
applicable to TIRs in NYSE Arca Equities Rule 8.200 and Commentary .02 
thereto. With respect to application of Rule 10A-3 under the Act,\17\ 
the Funds must be in compliance with NYSE Arca Equities Rule 5.3 and 
Rule 10A-3 under the Act. A minimum of 100,000 Shares of each of the 
Funds will be outstanding as of the start of trading on the Exchange.
---------------------------------------------------------------------------

    \17\ 17 CFR 240.10A-3.
---------------------------------------------------------------------------

Suitability
    Currently, NYSE Arca Equities Rule 9.2(a) (Diligence as to 
Accounts) provides that an ETP Holder, before recommending a 
transaction in any security, must have reasonable grounds to believe 
that the recommendation is suitable for the customer based on any facts 
disclosed by the customer as to its other security holdings and as to 
its financial situation and needs. Further, the rule provides, with a 
limited exception, that prior to the execution of a transaction 
recommended to a non-institutional customer, the ETP Holder must make 
reasonable efforts to obtain information concerning the customer's 
financial status, tax status, investment objectives, and any other 
information

[[Page 28497]]

that such ETP Holder believes would be useful to make a recommendation.
    Prior to the commencement of trading, the Exchange will inform its 
ETP Holders of the suitability requirements of NYSE Arca Equities Rule 
9.2(a) in an Information Bulletin. Specifically, ETP Holders will be 
reminded in the Information Bulletin that, in recommending transactions 
in the Shares, they must have a reasonable basis to believe that (1) 
the recommendation is suitable for a customer given reasonable inquiry 
concerning the customer's investment objectives, financial situation, 
needs, and any other information known by such member, and (2) the 
customer can evaluate the special characteristics, and is able to bear 
the financial risks, of an investment in the Shares. In connection with 
the suitability obligation, the Information Bulletin will also provide 
that members must make reasonable efforts to obtain the following 
information: (1) The customer's financial status; (2) the customer's 
tax status; (3) the customer's investment objectives; and (4) such 
other information used or considered to be reasonable by such member or 
registered representative in making recommendations to the customer.
    In addition, FINRA has implemented increased sales practice and 
customer margin requirements for FINRA members applicable to leveraged 
ETFs (which include the Shares) and options on leveraged ETFs, as 
described in FINRA Regulatory Notices 09-31 (June 2009), 09-53 (August 
2009) and 09-65 (November 2009) (the ``FINRA Regulatory Notices''). ETP 
Holders that carry customer accounts will be required to follow the 
FINRA guidance set forth in these notices.
    As disclosed in the Registration Statement, the Funds seek 
leveraged, inverse, or leveraged inverse returns on a daily basis. 
Unlike conventional stock-based indexes and funds, it is not expected 
that the VIX Futures Indexes or the Funds will generally rise over 
time. In addition, the Exchange's Information Bulletin regarding the 
Funds, described below, will provide information regarding the 
suitability of an investment in the Shares, as stated in the 
Registration Statement.
Surveillance
    The Exchange intends to utilize its existing surveillance 
procedures applicable to derivative products, including TIRs, to 
monitor trading in the Shares. The Exchange represents that these 
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.
    The Exchange's current trading surveillances focus on detecting 
securities trading outside their normal patterns. When such situations 
are detected, surveillance analysis follows and investigations are 
opened, where appropriate, to review the behavior of all relevant 
parties for all relevant trading violations. The Exchange is able to 
obtain information regarding trading in the Shares, options, futures or 
options on futures on Shares through ETP Holders, in connection with 
such ETP Holders' proprietary or customer trades through ETP Holders 
which they effect on any relevant market. The Exchange can obtain 
market surveillance information, including customer identity 
information, with respect to transactions occurring on the exchanges 
that are members of the Intermarket Surveillance Group (``ISG''), 
including the CBOE and CFE, or with which the Exchange has entered into 
a comprehensive surveillance sharing agreement.\18\ A list of ISG 
members is available at http://www.isgportal.org.\19\
---------------------------------------------------------------------------

    \18\ Telephone call among Michael Cavalier, Chief Counsel, 
Exchange, and Tim Malinowski, Senior Director, Global Index and 
Exchange Traded Funds, Exchange, and Ed Cho and Kristie Diemer, 
Special Counsels, Division, Commission, on May 11, 2011, clarifying 
the Exchange's ability to obtain surveillance information.
    \19\ The Exchange notes that not all components of the Funds' 
holdings may trade on markets that are members of ISG or with which 
the Exchange has in place a comprehensive surveillance sharing 
agreement.
---------------------------------------------------------------------------

    In addition, with respect to any Fund's holdings of futures 
contracts traded on exchanges, not more than 10% of the weight of such 
futures contracts in the aggregate shall consist of components whose 
principal trading market is not a member of ISG or is a market with 
which the Exchange does not have a comprehensive surveillance sharing 
agreement.
    The Exchange also has a general policy prohibiting the distribution 
of material, non-public information by its employees.
Information Bulletin
    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: (1) The risks involved 
in trading the Shares during the Opening and Late Trading Sessions when 
an updated IOPV will not be calculated or publicly disseminated; (2) 
the procedures for purchases and redemptions of Shares in Creation 
Baskets and Redemption Baskets (and that Shares are not individually 
redeemable); (3) 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; (4) 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 (5) trading information.
    The Information Bulletin will advise ETP Holders, prior to the 
commencement of trading, of the prospectus delivery requirements 
applicable to the Funds. The Exchange notes that investors purchasing 
Shares directly from the Funds will receive a prospectus. ETP Holders 
purchasing Shares from the Funds for resale to investors will deliver a 
prospectus to such investors. The Information Bulletin will reference 
the FINRA Regulatory Notices regarding sales practice and customer 
margin requirements for FINRA members applicable to leveraged ETFs and 
options on leveraged ETFs. The Information Bulletin will also discuss 
any exemptive, no-action and interpretive relief granted by the 
Commission from any rules under the Act.
    In addition, the Information Bulletin will reference that the Funds 
are subject to various fees and expenses described in the Registration 
Statement. The Information Bulletin will also reference that the 
Commodity Futures Trading Commission has regulatory jurisdiction over 
futures contracts traded on U.S. markets.
    The Information Bulletin will also disclose the trading hours of 
the Shares of the Funds and that the NAV for the Shares is calculated 
after 4:15 p.m. E.T. each trading day. The Bulletin will disclose that 
information about the Shares of the Funds is publicly available on the 
Funds' Web site.
2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under Section 6(b)(5) \20\ that an exchange have rules that 
are designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to remove 
impediments to, and perfect the mechanism of a free and open market 
and, in general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \20\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that the proposed rule change is designed to

[[Page 28498]]

prevent fraudulent and manipulative acts and practices in that the 
Shares will be listed and traded on the Exchange pursuant to the 
initial and continued listing criteria in NYSE Arca Equities Rule 8.200 
and Commentary .02 thereto. The Exchange has in place surveillance 
procedures that are adequate to properly monitor trading in the Shares 
in all trading sessions and to deter and detect violations of Exchange 
rules and applicable Federal securities laws. The Exchange may obtain 
information via ISG from other exchanges that are members of ISG or 
with which the Exchange has entered into a comprehensive surveillance 
sharing agreement. Under normal market conditions, the Funds will 
invest in VIX Futures Contracts, which are traded on CFE, an ISG 
member. The intra-day futures prices, closing price and settlement 
prices of the futures contracts held by the Funds are also available 
from the CFE, automated quotation systems, published or other public 
sources, or on-line information services. Quotation and last-sale 
information for the Shares will be available via CTA. Each Fund's total 
portfolio composition will be disclosed on the Funds' Web site or 
another relevant Web site.
    The proposed rule change is designed to promote just and equitable 
principles of trade and to protect investors and the public interest in 
that a large amount of information is publicly available regarding the 
Funds and the Shares, thereby promoting market transparency. One or 
more major market data vendors will disseminate the level of each Index 
at least every 15 seconds both in real time from 9:30 a.m. to 4:15 p.m. 
E.T. and at the close of trading on each Business Day. The NAV per 
Share will be calculated daily and made available to all market 
participants at the same time. One or more major market data vendors 
will disseminate for the Funds on a daily basis information with 
respect to the recent NAV per Share and Shares outstanding. NYSE Arca 
will calculate and disseminate every 15 seconds throughout the NYSE 
Arca Core Trading Session an updated IOPV. Trading in Shares of the 
Funds will be halted if the circuit breaker parameters in NYSE Arca 
Equities Rule 7.12 have been reached or because of market conditions or 
for reasons that, in the view of the Exchange, make trading in the 
Shares inadvisable. Moreover, 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. 
The Information Bulletin will also reference the FINRA Regulatory 
Notices regarding sales practice and customer margin requirements for 
FINRA members applicable to leveraged ETFs and options on leveraged 
ETFs.
    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 products 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 with which the Exchange has entered into a comprehensive 
surveillance sharing agreement. In addition, as noted above, investors 
will have ready access to information regarding the Funds' holdings, 
IOPV, and quotation and last-sale information for the Shares.

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 purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to 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 Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-NYSEArca-2011-23 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NYSEArca-2011-23. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for Web site 
viewing and printing in the Commission's Public Reference Room, 100 F 
Street, NE., Washington, DC 20549, on official business days between 
the hours of 10 a.m. and 3 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; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File No. SR-
NYSEArca-2011-23 and should be submitted on or before June 7, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
---------------------------------------------------------------------------

    \21\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-12017 Filed 5-16-11; 8:45 am]
BILLING CODE 8011-01-P


