
[Federal Register Volume 77, Number 219 (Tuesday, November 13, 2012)]
[Notices]
[Pages 67707-67711]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-27550]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68165; File No. SR-NYSEArca-2012-102]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting 
Approval of Proposed Rule Change Relating to the Listing and Trading of 
Twelve Funds of the Direxion Shares ETF Trust II Under NYSE Arca 
Equities Rule 8.200

 November 6, 2012.

I. Introduction

    On September 5, 2012, NYSE Arca, Inc. (``Exchange'' or ``NYSE 
Arca'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to list and trade shares 
(``Shares'') of twelve funds of the Direxion Shares ETF Trust II (each 
a ``Fund'' and, collectively, ``Funds'') under NYSE Arca Equities Rule 
8.200, Commentary .02. The proposed rule change was published for 
comment in the Federal Register on September 24, 2012.\3\ The 
Commission received no comments on the proposed rule change. 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. 67882 (September 18, 
2012), 77 FR 58881 (``Notice'').
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II. Description of the Proposed Rule Change

    The Exchange proposes to list and trade Shares of the following 
Funds pursuant to NYSE Arca Equities Rule 8.200, Commentary .02: 
Direxion Daily Gold Bear 1X Shares; Direxion Daily Gold Bull 3X Shares; 
Direxion Daily Gold Bear 3X Shares; Direxion Daily Silver Bear 1X 
Shares; Direxion Daily Silver Bull 3X Shares; Direxion Daily Silver 
Bear 3X Shares; Direxion Daily Japanese Yen Bull 3X Shares; Direxion 
Daily Japanese Yen Bear 3X Shares; Direxion Daily Dollar Bull 3X 
Shares; Direxion Daily Dollar Bear 3X Shares; Direxion Daily Euro Bull 
3X Shares; and Direxion Daily Euro Bear 3X Shares.\4\
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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.
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    The Shares will be issued by Direxion Shares ETF Trust II 
(``Trust''), a Delaware statutory trust.\5\ Direxion Asset Management, 
LLC will be the sponsor (``Sponsor'') for the Trust. The Bank of New 
York Mellon will be the administrator, custodian, and transfer agent 
for the Funds, and Foreside Fund Services, LLC will be the distributor 
for the Shares.
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    \5\ See Pre-Effective Amendment No. 1 to Form S-1, dated October 
13, 2010 (``Registration Statement'') (File No. 333-168227).
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Twelve Funds of the Direxion Shares ETF Trust II

    All Funds except for the Direxion Daily Gold Bear 1X Shares and 
Direxion Daily Silver Bear 1X Shares are also referred to herein as 
``Leveraged Funds,'' and the Direxion Daily Gold Bear 1X Shares and 
Direxion Daily Silver Bear 1X Shares are also referred to herein as 
``Bear 1X Funds.'' The Leveraged Funds will seek daily leveraged 
investment results and are intended to be used as short-term trading 
vehicles. The Leveraged Funds with the word ``Bull'' in their name 
(collectively, ``Leveraged Bull Funds'') will attempt to provide daily 
leveraged investment results (before fees and expenses) that correlate 
positively to three times (300%) the daily return of a target 
benchmark, meaning a Leveraged Bull Fund will attempt to move in the 
same direction as the target benchmark. The Leveraged Funds with the 
word ``Bear'' in their name (collectively, ``Leveraged Bear Funds'') 
will attempt to provide daily leveraged investment results (before fees 
and expenses) that correlate to the inverse (opposite) of three times 
the return of a target benchmark, meaning that the Leveraged Bear Funds 
will attempt to move in the opposite or inverse direction of the target 
benchmark.
    The Bear 1X Funds will attempt to provide daily investment results 
(before fees and expenses) that correlate to the inverse (opposite) of 
the return of a target benchmark commodity, meaning that the Bear 1X 
Funds will attempt to move in the opposite or inverse direction of a 
target benchmark commodity.

Principal Investment Strategies

    In seeking to achieve each Fund's daily investment objective, the 
Sponsor will use statistical and quantitative analysis to determine the 
investments each Fund will make and the techniques it will employ. 
Using this approach, the Sponsor will determine the type, quantity, and 
mix of investment positions that the Sponsor believes in combination 
should produce daily returns consistent with a Fund's objective. The 
Sponsor will rely upon a pre-determined model to generate orders that 
result in repositioning each Fund's investments in accordance with its 
daily investment objective. As a consequence, if a Fund is performing 
as designed, the return of the applicable benchmark (as discussed 
below) will dictate the return for that Fund. Each Fund will pursue its 
investment objective regardless of market conditions and will not take 
defensive positions.
    Each of the Direxion Daily Gold Bear 1X Shares, Direxion Daily Gold 
Bull 3X Shares, and Direxion Daily Gold Bear 3X Shares (collectively, 
``Gold Funds'') and Direxion Daily Silver Bear 1X Shares, Direxion 
Daily Silver Bull 3X Shares, and Direxion Daily Silver Bear 3X Shares 
(collectively, ``Silver Funds,'' and collectively with the Gold Funds, 
``Commodity Funds'') will seek to achieve its investment objective by 
investing in futures contracts related to its benchmark commodity. As 
such, the Gold Funds will invest in gold futures contracts traded on 
the Commodity Exchange, Inc. (``COMEX,'' an affiliate of the CME Group, 
Inc. (``CME'')) (``Gold Futures Contracts''), and the Silver Funds will 
invest in silver futures contracts traded on COMEX (``Silver Futures 
Contracts'' and, collectively with Gold Futures Contracts,

[[Page 67708]]

``Commodity Futures Contracts'').\6\ For each of the Commodity Funds, 
in the event position limits or position accountability levels are 
reached with respect to the applicable Commodity Futures Contracts, or 
if trading of such Commodity Futures Contracts is suspended due to 
price fluctuation limits being reached or if the CME imposes any other 
suspension or limitation on trading in a Commodity Futures Contract, 
the Sponsor may, in its commercially reasonable judgment, cause the 
Commodity Funds to obtain exposure through cash-settled, exchange-
traded options on Commodity Futures Contracts, as applicable, and 
forward contracts, swaps,\7\ and other over-the-counter transactions 
that are based on the price of Commodity Futures Contracts, as 
applicable, if such instruments tend to exhibit trading prices or 
returns that correlate with any Commodity Futures Contract and will 
further the investment objective of such Commodity Fund (collectively, 
``Commodity Financial Instruments'').\8\
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    \6\ According to the Exchange, Gold and Silver Futures Contracts 
traded on COMEX are the global benchmark contracts and most liquid 
futures contracts in the world for each respective commodity. As of 
March 15, 2012, open interest in Gold Futures Contracts and Silver 
Futures Contracts traded on the CME was $23.7 billion and $8.5 
billion, respectively. Gold Futures Contracts and Silver Futures 
Contracts had an average daily trading volume in 2011 of 138,964 
contracts and 63,913 contracts, respectively. The trading hours for 
the Gold Futures Contracts and Silver Futures Contracts are 8:20 
a.m. until 1:30 p.m. Eastern Time (``E.T.'').
    \7\ To the extent practicable, the Commodity Funds will invest 
in swaps cleared through the facilities of a centralized clearing 
house.
    \8\ Each Fund will enter into swap agreements and other over-
the-counter transactions only with large, established and well 
capitalized financial institutions that meet certain credit quality 
standards and monitoring policies. Each Fund will use various 
techniques to minimize credit risk including early termination or 
reset and payment, using different counterparties and limiting the 
net amount due from any individual counterparty.
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    The Gold Funds' benchmark will be the daily last sale price 
occurring on or before 4:00 p.m. E.T. of a standard Gold Futures 
Contract for 100 troy ounces of gold, specified by the CME to be of a 
grade and quality that shall assay to a minimum of 995 fineness, as 
measured in U.S. Dollars and cents per troy ounce with a minimum 
fluctuation of $0.10 per troy ounce (``Gold Benchmark Futures 
Contract''). The Silver Funds' benchmark will be the daily last sale 
price occurring on or before 4:00 p.m. E.T. of a standard Silver 
Futures Contract for 5,000 troy ounces of silver, specified by the CME 
to be at a grade and quality that shall assay to a minimum of 999 
fineness, as measured in U.S. Dollars and cents per troy ounce with a 
minimum fluctuation of $0.10 per troy ounce (``Silver Benchmark Futures 
Contract''). For both the Gold Benchmark Futures Contract and the 
Silver Benchmark Futures Contract, the last sale price value will be 
calculated as the last sale price published by the CME on or before 
4:00 p.m. E.T. for the current active month Commodity Futures Contract. 
The last sale price and benchmark valuation may reflect trades 
occurring and published by the CME outside the normal trading session 
for the applicable Commodity Futures Contract.
    Each of the Direxion Daily Japanese Yen Bull 3X Shares and Direxion 
Daily Japanese Yen Bear 3X Shares (collectively, ``Yen Funds''); 
Direxion Daily Dollar Bull 3X Shares and Direxion Daily Dollar Bear 3X 
Shares (collectively, ``Dollar Funds''); and Direxion Daily Euro Bull 
3X Shares and Direxion Daily Euro Bear 3X Shares (collectively, ``Euro 
Funds'' and, collectively with the Yen Funds and Dollar Funds, 
``Currency Funds'') will seek to achieve its investment objective by 
investing in futures contracts related to its benchmark currency. As 
such, the Yen Funds will invest in Japanese Yen futures contracts 
traded on the CME (``Yen Futures Contracts''), the Euro Funds will 
invest in Euro futures traded on the CME (``Euro Futures Contracts''), 
and the Dollar Funds will invest in U.S. Dollar Index futures contracts 
traded on the ICE Futures U.S. (``ICE'') (``Dollar Futures Contracts'' 
and, collectively with Yen Futures Contracts and Euro Futures 
Contracts, ``Currency Futures Contracts'').\9\ For each Currency Fund 
except the Dollar Funds, which invest in futures contracts that do not 
have position limits, accountability levels, or price fluctuation 
limits, in the event position limits or position accountability levels 
are reached with respect to the applicable Currency Futures Contracts, 
or if trading of such Currency Futures Contracts is suspended due to 
price fluctuation limits being reached or if the CME or ICE (with 
respect to the Dollar Funds), as applicable, imposes any other 
suspension or limitation on trading in a Currency Futures Contract, the 
Sponsor may, in its commercially reasonable judgment, cause the 
Currency Funds to obtain exposure through cash-settled, exchange-traded 
options on Currency Futures Contracts, as applicable, and forward 
contracts, swaps,\10\ and other over-the-counter transactions that are 
based on the price of Currency Futures Contracts, as applicable, if 
such instruments tend to exhibit trading prices or returns that 
correlate with any Currency Futures Contract and will further the 
investment objective of such Currency Fund (collectively, ``Currency 
Financial Instruments'').
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    \9\ According to the Exchange, the CME constitutes the largest 
regulated foreign exchange marketplace in the world, with over $100 
billion in daily liquidity. As of March 15, 2012, open interest in 
Euro Futures Contracts and Yen Futures Contracts traded on the CME 
and, for Dollar Futures Contracts, on the ICE, were $42.7 billion, 
$20.8 billion, and $4.8 billion, respectively. Euro Futures 
Contracts, Yen Futures Contracts, and Dollar Futures Contracts had 
an average daily trading volume in 2011 of 325,103, 106,824, and 
27,258 contracts, respectively. The trading hours for the Euro 
Futures Contracts and Yen Futures Contracts are 8:20 a.m. until 3:00 
p.m. E.T., and the trading hours for the Dollar Futures Contracts 
are 8:00 p.m. E.T. until 5:00 p.m. E.T. the following day.
    \10\ To the extent practicable, the Currency Funds will invest 
in swaps cleared through the facilities of a centralized clearing 
house.
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    The benchmark for the Yen Funds will be the last sale price 
occurring on or before 4:00 p.m. E.T. of a standard Yen Futures 
Contract for 12,500,000 Japanese Yen, priced in U.S. Dollars and traded 
on the CME (``Yen Benchmark Futures Contract''). The benchmark for the 
Euro Funds will be the last sale price occurring on or before 4:00 p.m. 
E.T. of a standard Euro Futures Contract for 125,000 Euro, priced in 
U.S. Dollars and traded on the CME (``Euro Benchmark Futures 
Contract''). For both the Yen Benchmark Futures Contract and Euro 
Benchmark Futures Contract, the last sale price value will be 
calculated as the last sale price published by the CME on or before 
4:00 p.m. E.T. for the current active month Currency Futures Contract. 
The last sale price and benchmark valuation may reflect trades 
occurring and published by the CME outside the normal trading session 
for the applicable Currency Futures Contract.
    The benchmark for the Dollar Funds will be the last sale price 
occurring on or before 4:00 p.m. E.T. of a standard Dollar Futures 
Contract for $1,000 times the U.S. Dollar Index value as measured in 
U.S. Dollars and traded on the ICE (``Dollar Benchmark Futures 
Contract'' and, collectively with the Gold Benchmark Futures Contract, 
Silver Benchmark Futures Contract, Yen Benchmark Futures Contract, and 
Euro Benchmark Futures Contract, ``Benchmark Futures Contracts''). The 
U.S. Dollar Index indicates the general international value of the U.S. 
Dollar. The U.S. Dollar Index does this by geometrically weighting the 
exchange rates between the U.S. Dollar and six major world currencies. 
The U.S. Dollar Index consists of the following six currencies: Euro, 
Japanese Yen, British Pound, Canadian Dollar, Swedish Krona, and Swiss 
Franc. The components and weightings are held

[[Page 67709]]

constant, and have not changed since the introduction of the Euro. 
Because the U.S. Dollar Index is geometrically weighted, holding the 
individual currencies in their specified weights will not necessarily 
mimic U.S. Dollar Index moves. The last sale price for the Dollar 
Benchmark Futures Contract will be calculated using the last sale price 
published by the ICE on or before 4:00 p.m. E.T. for the current active 
month Dollar Futures Contract.
    In seeking its investment objective, each Fund will invest in 
Commodity or Currency Futures Contracts, as applicable, including (but 
not limited to) \11\ the Fund's related Benchmark Futures Contract, as 
well as Commodity or Currency Financial Instruments in certain 
circumstances. Assets of each Fund not invested in Commodity Futures 
Contracts, Currency Futures Contracts, or other Commodity Financial 
Instruments or Currency Financial Instruments, as applicable, will be 
held in cash or invested in cash equivalents and/or U.S. Treasury 
Securities or other high credit quality short-term fixed-income or 
similar securities (such as shares of money market funds, bank 
deposits, bank money market accounts, certain variable rate-demand 
notes, and repurchase agreements collateralized by government 
securities, whether denominated in U.S. or the applicable foreign 
currency with respect to a Currency Fund) that serve as collateral for 
Commodity Futures Contracts, Currency Futures Contracts, and Commodity 
or Currency Financial Instruments, as applicable.
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    \11\ A Fund, in seeking to achieve its investment objective by 
investing in futures contracts related to its target benchmark, may 
be invested in futures contracts that are not the current active 
month futures contracts on which the Fund's target benchmark is 
based. For example, if, on a date in September 2012, the current 
active month futures contract with respect to a target benchmark is 
December 2012, a Fund may have a portion of its assets in the 
October 2012 or February 2013 contracts. A Fund may use this 
flexibility, for example, in case of liquidity issues with respect 
to the applicable, current active month futures contracts or when 
deciding when to roll the Fund's assets into the next current active 
month contract.
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    At the close of the U.S. equity markets each trading day, each Fund 
will position its portfolio to ensure that the Fund's exposure to its 
benchmark is consistent with the Fund's stated goals. The impact of 
market movements during the day will determine whether a portfolio 
needs to be repositioned. If the target benchmark has risen on a given 
day, a Leveraged Bull Fund's net assets should rise, meaning their 
exposure may need to be increased. Conversely, if the target benchmark 
has fallen on a given day, a Leveraged Bull Fund's net assets should 
fall, meaning their exposure may need to be reduced.
    If a Leveraged Bull Fund is successful in meeting its objective, 
its value in a given day (before fees and expenses) should gain 
approximately three times as much on a percentage basis as its 
corresponding benchmark when the benchmark rises during a given day. 
Conversely, its value in a given day (before fees and expenses) should 
lose approximately three times as much on a percentage basis as the 
corresponding benchmark when the benchmark declines during a given day. 
Each Leveraged Bull Fund will acquire long exposure through investment 
in Commodity or Currency Futures Contracts, including (but not limited 
to) the applicable Benchmark Futures Contracts, and, once position 
limits or position accountability levels are reached, if trading of 
such Commodity or Currency Futures Contracts is suspended due to price 
fluctuation limits being reached, or if the CME or ICE, as applicable, 
imposes any other suspension or limitation on trading in a Commodity or 
Currency Futures Contract, in Commodity Financial Instruments or 
Currency Financial Instruments, as applicable, such that each Leveraged 
Bull Fund has approximately 300% exposure to the corresponding 
benchmark at the time of the net asset value (``NAV'') calculation.
    If a Leveraged Bear Fund is successful in meeting its objective, 
its value in a given day (before fees and expenses) should gain 
approximately three times as much on a percentage basis as its 
corresponding benchmark loses when the benchmark falls in a given day. 
Conversely, its value in a given day (before fees and expenses) should 
lose approximately three times as much on a percentage basis as the 
corresponding benchmark gains when the benchmark rises in a given day. 
Each Leveraged Bear Fund will acquire short exposure through investment 
in Commodity or Currency Futures Contracts, including (but not limited 
to) the applicable Benchmark Futures Contracts, and, once position 
limits or position accountability levels are reached, if trading of 
such Commodity or Currency Futures Contracts is suspended due to price 
fluctuation limits being reached, or if the CME or ICE, as applicable, 
imposes any other suspension or limitation on trading in a Commodity or 
Currency Futures Contract, in Commodity Financial Instruments or 
Currency Financial Instruments, as applicable, such that each Leveraged 
Bear Fund has approximately -300% exposure to the corresponding 
benchmark at the time of the NAV calculation.
    If a Bear 1X Fund is successful in meeting its objective, its value 
in a given day (before fees and expenses) should gain approximately an 
equal amount on a percentage basis as its corresponding benchmark when 
the benchmark falls in a given day. Conversely, its value in a given 
day (before fees and expenses) should lose approximately an equal 
amount on a percentage basis as the corresponding benchmark when the 
benchmark rises in a given day. Each Bear 1X Fund will acquire short 
exposure through investment in Commodity Futures Contracts, including 
(but not limited to) the applicable Benchmark Futures Contracts, and, 
once position limits or position accountability levels, if applicable, 
are reached, if trading of the Commodity Futures Contracts is suspended 
due to price fluctuation limits being reached, or if the CME imposes 
any other suspension or limitation on trading in a Commodity Futures 
Contract, a Bear 1X Fund may invest in Commodity Financial Instruments 
such that each Bear 1X Fund has approximately -100% exposure to the 
corresponding benchmark at the time of the NAV calculation.
    In the event that trading of a Commodity or Currency Futures 
Contract is suspended due to price fluctuation limits being reached for 
that futures contract, or if CME or ICE, as applicable, imposes any 
other suspension or limitation on trading in a Commodity or Currency 
Futures Contract, the related Fund or Funds may be limited in their 
ability to seek their investment objective until trading resumes.
    Additional information regarding the Funds and the Shares, 
including investment strategies, risks, creation and redemption 
procedures, NAV, fees, portfolio holdings disclosure, distributions, 
and taxes, among other things, is included in the Notice and 
Registration Statement, as applicable.\12\
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    \12\ See Notice and Registration Statement, supra notes 3 and 5, 
respectively.
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III. Discussion and Commission's Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of Section 6 of the Act \13\ 
and the rules and regulations thereunder applicable to a national 
securities exchange.\14\ In

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particular, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Act,\15\ which requires, among 
other things, that the Exchange's rules be 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. The Commission notes that the Funds 
and the Shares must comply with the requirements of NYSE Arca Equities 
Rule 8.200 and Commentary .02 thereto to be listed and traded on the 
Exchange.
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    \13\ 15 U.S.C. 78f.
    \14\ 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).
    \15\ 15 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,\16\ which sets forth Congress's 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 for the Shares will be disseminated through the 
facilities of the Consolidated Tape Association (``CTA''). The value of 
the benchmarks, updated at least every 15 seconds during the NYSE Arca 
Core Trading Session, will be disseminated by one or more major market 
data vendors. The closing and daily settlement prices for the Commodity 
and Currency Futures Contracts are publicly available on the Web site 
of the CME and ICE, as applicable. Intraday prices for the Commodity 
and Currency Futures Contracts are updated at least every 15 seconds 
and are available through major market data vendors. Further, the 
applicable specific contract specifications for Commodity and Currency 
Futures Contracts are available from the CME and ICE Web sites, as well 
as other financial information sources. Real-time dissemination of spot 
pricing for gold, silver, Yen, Euro, and currencies included in the 
U.S. Dollar Index is available on a 24-hour basis worldwide from 
various major market data vendors. In addition, there is a considerable 
amount of foreign currency price and market information available on 
public Web sites and through professional and subscription services, 
including price information with respect to currencies included in the 
U.S. Dollar Index. The U.S. Dollar Index value is disseminated every 15 
seconds by major market data vendors during the Exchange's Core Trading 
Session. Further, the Funds will provide Web site disclosure of 
portfolio holdings daily and will include, as applicable, the names and 
value (in U.S. dollars) of Commodity Futures Contracts and Currency 
Futures Contracts, as applicable; Commodity Financial Instruments and 
Currency Financial Instruments, if any; and the amount of cash and/or 
cash equivalents held in the portfolio of the Funds. This Web site 
disclosure will occur at the same time as the disclosure by the Sponsor 
of the portfolio composition to authorized participants so that all 
market participants are provided portfolio composition information at 
the same time. The current trading prices of each Fund will be 
published continuously under its ticker symbol as trades occur 
throughout each trading day via CTA, Reuters, and/or Bloomberg. The 
intraday indicative value (``IIV'') with respect to each Fund will be 
updated every 15 seconds and be widely disseminated by one or more 
major market data vendors during the NYSE Arca Core Trading 
Session.\17\ The NAV of each Fund will be calculated at 4:00 p.m. E.T. 
and will be disseminated daily to all market participants at the same 
time. Recent NAV and Shares outstanding will be disseminated on a daily 
basis via CTA. The Web site of the Funds and/or the Exchange will 
include the prospectus for the Funds and additional data relating to 
NAV and other applicable quantitative information.
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    \16\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \17\ According to the Exchange, several major market data 
vendors display and/or make widely available IIVs taken from the CTA 
or other data feeds. In addition, the Exchange states that 
circumstances may arise in which the NYSE Arca Core Trading Session 
is in progress, but trading in Commodity or Currency Futures 
Contracts is not occurring. Such circumstances may result from 
reasons including, but not limited to, the CME or ICE, as 
applicable, having a separate holiday schedule than the NYSE Arca, 
the CME or ICE closing prior to the close of the NYSE Arca, price 
fluctuation limits being reached in a Commodity or Currency Futures 
Contract, or the CME or ICE, as applicable, imposing any other 
suspension or limitation on trading in a Commodity or Currency 
Futures Contract. In such instances, the value of the applicable 
Commodity or Currency Futures Contracts, as well as Commodity or 
Currency Financial Instruments whose value is derived from the 
Commodity or Currency Futures Contracts, held by the Funds would be 
static or priced by the Fund at the applicable early cut-off time of 
the exchange trading the applicable Commodity or Currency Futures 
Contract. Moreover, any cash held by the Funds for collateralization 
purposes will be invested in short term treasury vehicles that do 
not have market exposure, such that their value would change 
throughout the trading day. As such, during such periods, the 
disseminated IIV for the affected Fund or Funds will be static.
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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 appropriately and 
to prevent trading when a reasonable degree of transparency cannot be 
assured. 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 times as the NAV is 
available to all market participants. Further, the Exchange represents 
that it may halt trading during the day in which an interruption to the 
dissemination of the IIV, trading in the applicable Commodity or 
Currency Futures Contract, or trading in Currency or Commodity 
Financial Instruments occurs for a Fund. If the 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. The Exchange may halt trading in the Shares if trading is 
not occurring in the Commodity or Currency Futures Contracts or 
Commodity or Currency Financial Instruments held by the Funds, or if 
other unusual conditions or circumstances detrimental to the 
maintenance of a fair and orderly market are present.\18\ The Exchange 
states that it has a general policy prohibiting the distribution of 
material, non-public information by its employees. Moreover, the 
trading of the Shares will be subject to NYSE Arca Equities Rule 8.200, 
Commentary .02(e), which sets forth certain restrictions on Equity 
Trading Permit (``ETP'') Holders \19\ acting as registered Market 
Makers \20\ in Trust Issued Receipts to facilitate surveillance. The 
Exchange is able to obtain information regarding trading in the Shares, 
the physical commodities or currencies underlying options, futures or 
options on futures through ETP Holders, in connection with such ETP 
Holders' proprietary or customer trades which they effect through ETP 
Holders on any relevant market. The Exchange can obtain market

[[Page 67711]]

surveillance information, including customer identity information, with 
respect to transactions (including transactions in cash-settled options 
on Commodity or Currency Futures Contracts) occurring on the CME, ICE, 
or COMEX (``Futures Exchanges''), which are members of the Intermarket 
Surveillance Group (``ISG'').
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    \18\ With respect to trading halts, the Exchange may consider 
other relevant factors in exercising its discretion to halt or 
suspend trading in the Shares of the Funds. Trading in Shares of the 
Funds will be halted if the circuit breaker parameters in NYSE Arca 
Equities Rule 7.12 have been reached. Trading also may be halted 
because of market conditions or for reasons that, in the view of the 
Exchange, make trading in the Shares inadvisable.
    \19\ See NYSE Arca Equities Rule 1.1(n) (defining ETP Holder).
    \20\ See NYSE Arca Equities Rule 1.1(v) (defining Market Maker).
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    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 ETP Holder, 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 ETP Holders 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 ETP 
Holder or registered representative in making recommendations to the 
customer.
    In addition, the Exchange states that the Financial Industry 
Regulatory Authority (``FINRA'') has implemented increased sales 
practice and customer margin requirements for FINRA members applicable 
to leveraged exchange-traded funds (which include the Shares) and 
options on leveraged exchange-traded funds, as described in FINRA 
Regulatory Notices 09-31 (June 2009), 09-53 (August 2009), and 09-65 
(November 2009) (collectively, ``FINRA Regulatory Notices''). ETP 
Holders that carry customer accounts will be required to follow the 
FINRA guidance set forth in these notices. As noted above, each 
Leveraged Fund will seek a multiple or inverse multiple (plus or minus 
300%) of the return (before fees and expenses) of its target benchmark 
commodity or currency on a given day, and each Bear 1X Fund will seek -
100% of the return (before fees and expenses) of its target benchmark 
commodity on a given day. Over a period of time in excess of one day, 
the cumulative percentage increase or decrease in the NAV of the Shares 
of a Fund may diverge significantly from a multiple or inverse multiple 
of the cumulative percentage decrease or increase in the relevant 
benchmark due to a compounding effect.
    The Exchange represents that the Shares are deemed to be equity 
securities, thus rendering trading in the Shares 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 Shares 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 applicable to derivative 
products, which include Trust Issued Receipts, 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.
    (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 IIV will not be calculated or publicly 
disseminated; (b) except for the Dollar Funds, a static IIV may be 
disseminated between the close of trading of all applicable Commodity 
or Currency Futures Contracts on Futures Exchanges and the close of the 
NYSE Arca Core Trading Session; (c) the procedures for purchases and 
redemptions of Shares in Creation Units (and that Shares are not 
individually redeemable); (d) 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; 
(e) how information regarding the IIV is disseminated; (f) 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 (g) trading information. The 
Information Bulletin will further advise ETP Holders that FINRA has 
implemented increased sales practice and customer margin requirements 
for FINRA members applicable to leveraged exchange-traded funds (which 
include the Shares) and options on leveraged exchange-traded funds, as 
described in the FINRA Regulatory Notices.
    (5) For initial and continued listing, the Funds must be in 
compliance with NYSE Arca Equities Rule 5.3 and Rule 10A-3 under the 
Exchange Act.\21\
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    \21\ 17 CFR 240.10A-3.
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    (6) To the extent practicable, the Funds will invest in swaps 
cleared through the facilities of a centralized clearing house. In 
addition, each Fund will enter into swap agreements and other over-the-
counter transactions only with large, established and well capitalized 
financial institutions that meet certain credit quality standards and 
monitoring policies. Each Fund will use various techniques to minimize 
credit risk including early termination or reset and payment, using 
different counterparties and limiting the net amount due from any 
individual counterparty.
    (7) A minimum of 100,000 Shares of each Fund will be outstanding at 
the commencement of trading on the Exchange.
    This approval order is based on all of the Exchange's 
representations and description of the Funds, including those set forth 
above and in the Notice.\22\
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    \22\ The Commission notes that it does not regulate the market 
for futures in which the Funds plan to take positions, which is the 
responsibility of the Commodity Futures Trading Commission 
(``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 \23\ and the 
rules and regulations thereunder applicable to a national securities 
exchange.
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    \23\ 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,\24\ that the proposed rule change (SR-NYSEArca-2012-102) be, and 
it hereby is, approved.
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    \24\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-27550 Filed 11-9-12; 8:45 am]
BILLING CODE 8011-01-P


