
[Federal Register Volume 79, Number 10 (Wednesday, January 15, 2014)]
[Notices]
[Pages 2705-2715]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-00605]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71266; File No. SR-NYSEArca-2013-144]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Proposed Rule Change Relating To Listing and Trading of Shares of 
the ETSpreads HY Long Credit Fund, the ETSpreads HY Short Credit Fund, 
the ETSpreads IG Long Credit Fund and the ETSpreads IG Short Credit 
Fund Under NYSE Arca Equities Rule 8.600

January 9, 2014.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on December 27, 2013, 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 self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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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 the following 
under NYSE Arca Equities Rule 8.600 (``Managed Fund Shares''): the 
ETSpreads HY Long Credit Fund, the ETSpreads HY Short Credit Fund, the 
ETSpreads IG Long Credit Fund and the ETSpreads IG Short Credit Fund. 
The text of the proposed rule change is available on the Exchange's Web 
site at www.nyse.com, at the principal office of the Exchange, and at 
the Commission's Public Reference Room.

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

    In its filing with the Commission, the 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
    The Exchange proposes to list and trade shares (``Shares'') of the 
following under NYSE Arca Equities Rule 8.600 which governs the listing 
and trading of Managed Fund Shares \4\: the ETSpreads HY Long Credit 
Fund, the ETSpreads HY Short Credit Fund, the ETSpreads IG Long Credit 
Fund and the ETSpreads IG Short Credit Fund (each, a ``Fund'' and 
collectively, the ``Funds'').\5\ The Shares

[[Page 2706]]

will be offered by Exchange Traded Spreads Trust (the ``Trust''), a 
statutory trust organized under the laws of the State of Delaware and 
registered with the Commission as an open-end management investment 
company.\6\ ETSpreads, LLC (the ``Adviser'') is the investment adviser 
for each Fund and is registered as an ``investment adviser'' under the 
Investment Advisers Act of 1940 (the ``Advisers Act'').\7\ ALPS 
Distributors, Inc. (the ``Distributor'') will serve as the principal 
underwriter and distributor for each Fund. The Distributor is a broker-
dealer registered under the Act and is not affiliated with the Adviser. 
Commentary .06 to Rule 8.600 provides that, if the investment adviser 
to the investment company issuing Managed Fund Shares is affiliated 
with a broker-dealer, such investment adviser shall erect a ``fire 
wall'' between the investment adviser and the broker-dealer with 
respect to access to information concerning the composition and/or 
changes to such investment company portfolio.\8\ In addition, 
Commentary .06 further requires that personnel who make decisions on 
the open-end fund's portfolio composition must be subject to procedures 
designed to prevent the use and dissemination of material nonpublic 
information regarding the open-end fund's portfolio. The Adviser is not 
registered as a broker-dealer but is affiliated with a broker-dealer 
and has implemented a ``fire wall'' with respect to such broker-dealer 
regarding access to information concerning the composition and/or 
changes to the Funds' portfolios. If the Adviser elects to hire a sub-
adviser for the Funds that is also affiliated with a broker-dealer, 
such sub-adviser will implement a fire wall with respect to such 
broker-dealer regarding access to information concerning the 
composition and/or changes to the portfolios. In the event (a) the 
Adviser becomes newly affiliated with a broker-dealer, or (b) any new 
adviser or sub-adviser is a registered broker-dealer or becomes 
affiliated with a broker-dealer, it will implement a fire wall with 
respect to its relevant personnel or its broker-dealer affiliate 
regarding access to information concerning the composition and/or 
changes to a portfolio, and will be subject to procedures designed to 
prevent the use and dissemination of material non-public information 
regarding such portfolio.
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    \4\ A Managed Fund Share is a security that represents an 
interest in an investment company registered under the Investment 
Company Act of 1940 (15 U.S.C. 80a-1) (``1940 Act'') organized as an 
open-end investment company or similar entity that invests in a 
portfolio of securities selected by its investment adviser 
consistent with its investment objectives and policies. In contrast, 
an open-end investment company that issues Investment Company Units, 
listed and traded on the Exchange under NYSE Arca Equities Rule 
5.2(j)(3), seeks to provide investment results that correspond 
generally to the price and yield performance of a specific foreign 
or domestic stock index, fixed income securities index or 
combination thereof.
    \5\ The Commission previously approved listing and trading on 
the Exchange of actively managed funds under Rule 8.600. See 
Securities Exchange Act Release Nos. 57801 (May 8, 2008), 73 FR 
27878 (May 14, 2008) (SR-NYSEArca-2008-31) (order approving Exchange 
listing and trading of twelve actively-managed funds of the 
WisdomTree Trust); 61365 (January 15, 2010), 75 FR 4124 (January 26, 
2010) (SR-NYSEArca-2009-114) (order approving listing and trading of 
Grail McDonnell Fixed Income ETFs); 60981 (November 10, 2009), 74 FR 
59594 (November 18, 2009) (SR-NYSEArca-2009-79) (order approving 
listing and trading of five fixed income funds of the PIMCO ETF 
Trust); 63329 (November 17, 2010), 75 FR 71760 (November 24, 2010) 
(SR-NYSEArca-2010-86) (order approving listing and trading of 
Peritus High Yield ETF).
    \6\ The Trust is registered under the 1940 Act. On April 9, 
2013, the Trust filed with the Commission an amendment to the 
registration statement for the Funds on Form N-1A under the 
Securities Act of 1933 (15 U.S.C. 77a), and under the 1940 Act 
relating to the Funds (File Nos. 333-148886 and 811-22177) 
(``Registration Statement''). The Trust filed an Amended and 
Restated Application for an Order under Section 6(c) of the 1940 Act 
for exemptions from various provisions of the 1940 Act and rules 
thereunder (File No. 812-13486), dated January 9, 2013 (``Exemptive 
Application''). The Commission has issued an order granting certain 
exemptive relief to the Trust under the 1940 Act. See Investment 
Company Act Release No. 30378 (February 5, 2013) (``Exemptive 
Order''). Investments made by the Funds will comply with the 
conditions set forth in the Exemptive Order.
    \7\ 15 U.S.C. 80b-1.
    \8\ An investment adviser to an open-end fund is required to be 
registered under the Advisers Act. As a result, the Adviser and its 
related personnel are subject to the provisions of Rule 204A-1 under 
the Advisers Act relating to codes of ethics. This Rule requires 
investment advisers to adopt a code of ethics that reflects the 
fiduciary nature of the relationship to clients as well as 
compliance with other applicable securities laws. Accordingly, 
procedures designed to prevent the communication and misuse of non-
public information by an investment adviser must be consistent with 
Rule 204A-1 under the Advisers Act. In addition, Rule 206(4)-7 under 
the Advisers Act makes it unlawful for an investment adviser to 
provide investment advice to clients unless such investment adviser 
has (i) adopted and implemented written policies and procedures 
reasonably designed to prevent violation, by the investment adviser 
and its supervised persons, of the Advisers Act and the Commission 
rules adopted thereunder; (ii) implemented, at a minimum, an annual 
review regarding the adequacy of the policies and procedures 
established pursuant to subparagraph (i) above and the effectiveness 
of their implementation; and (iii) designated an individual (who is 
a supervised person) responsible for administering the policies and 
procedures adopted under subparagraph (i) above.
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Description of the Funds
    According to the Registration Statement and as described below, 
each Fund will seek to provide exposure to a long or short position 
with respect to a specific segment of the North American corporate 
credit markets.\9\ The strategy of each of the Funds involves buying 
and selling credit default swaps (``CDS'') to outperform, before fees 
and expenses, either a long or short position tied to its benchmark 
index. Currently, each Fund will use either the Markit CDX North 
American Investment Grade 5-year Total Return Index or the Markit CDX 
North American High Yield 5-year Total Return Index (each an ``Index'' 
or a ``CDX Index'' and together the ``Indices'') as its benchmark. A 
``CDX Index'' is an index comprised of multiple CDS with different 
``Reference Entities'' (as described below), all of which have equal 
weighting in the index. The Markit CDX North American Investment Grade 
5-year Total Return Index is designed to track the credit quality of 
125 investment grade North American debt issuers or the unsubordinated 
debt obligations of such debt issuers. The Markit CDX North American 
High Yield 5-year Total Return Index is designed to track the credit 
quality of 100 high yield North American debt issuers or the 
unsubordinated debt obligations of such debt issuers. None of the Funds 
will use leverage and each Fund will maintain sufficient assets at all 
times so that it can meet its payment, margin or other obligations 
without borrowing. In general, no leverage means that, for each $100 
million of assets under management, the relevant Fund will be a net 
buyer or seller (consistent with its investment objective) of 
protection on $100 million. While actual percentages will vary, it is 
generally expected that less than twenty percent of a Fund's assets 
will be in CDS and non-principal investments (as described below), and 
the balance of a Fund's assets will be U.S. Treasury securities, money 
market instruments and cash.
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    \9\ With respect to a particular credit market, a ``long 
position'' means that an investor expects that the issuers of debt 
securities in a particular debt market will be able to meet their 
obligations in accordance with the terms of such debt securities in 
full and on-time. With respect to a particular credit market, a 
``short position'' means that an investor expects there will be an 
increased likelihood that the issuers of debt securities in a 
particular debt market will not be able to meet their obligations in 
accordance with the terms of such debt securities in full or on-
time.
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    To meet its respective investment objective, under normal market 
conditions,\10\ each Fund intends to invest substantially all of its 
assets in (i) CDS that are cleared by a clearing organization and which 
are either (a) CDS index swaps, including swaps based on the CDX Index, 
(``CDX Index swaps''), based on multiple CDS relating to the debt 
issued by different Reference Entities,\11\ or (b) ``Single Name CDS'' 
(as described below), which are CDS that relate only to the debt issued 
by a single

[[Page 2707]]

Reference Entity \12\; (ii) futures contracts \13\ based on CDS or 
other similar futures contracts; and (iii) obligations of, or those 
guaranteed by, the United States government with a maturity of less 
than six years (``U.S. Treasury securities''), money market 
instruments, and cash.
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    \10\ The term ``under normal market conditions'' includes, but 
is not limited to, the absence of extreme volatility or trading 
halts in the fixed income markets or the financial markets 
generally; events or circumstances causing a disruption in market 
liquidity or orderly markets; 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.
    \11\ A ``Reference Entity'' is the entity whose debt underlies a 
Single Name CDS (as described below) and can be a corporation, 
government or other legal entity that issues debt of any kind. CDX 
Index swaps are based on a particular index that includes Single 
Name CDS of several Reference Entities.
    \12\ The Adviser represents that Fund transactions in CDS 
cleared through a clearing organization that have been designated by 
the Commodity Futures Trading Commission (``CFTC'') or the 
Commission as ``made available to trade'' will be executed on 
exchanges or on a swap execution facility subject to CFTC and/or 
Commission oversight or regulation.
    \13\ The Funds intend to invest only in futures contracts traded 
on exchanges that are subject to CFTC and/or Commission oversight or 
regulation.
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General Description of Swaps
    A Fund will enter into swap agreements to invest in a specific 
segment of the U.S. corporate credit market without owning or taking 
physical custody of the underlying debt securities or other interests. 
The initial counterparty to any CDS will typically be a bank, 
investment banking firm or broker-dealer. If the CDS is cleared, the 
swap with the initial counterparty will be replaced with a swap with 
the clearing house.
    Swap agreements typically are settled on a net basis, which means 
that the two payment streams are netted out, with a Fund receiving or 
paying, as the case may be, only the net amount of the two payments. 
Payments may be made at the conclusion of a swap agreement or 
periodically during its term.
    Swap agreements do not involve the delivery of securities or other 
underlying assets. Accordingly, the risk of loss with respect to swap 
agreements is limited to the net amount of payments that a Fund is 
contractually obligated to make. If a swap counterparty defaults, a 
Fund's risk of loss consists of the net amount of payments the Fund is 
contractually entitled to receive, if any. The net amount of the 
excess, if any, of a Fund's obligations over its entitlements with 
respect to each equity swap will be accrued on a daily basis, and an 
amount of cash or liquid assets having an aggregate net asset value 
(``NAV'') at least equal to such accrued excess will be maintained in a 
segregated account by the Fund's custodian, The Bank of New York 
Mellon.
    According to the Registration Statement, the CDS market has grown 
substantially in recent years with a large number of banks and 
investment banking firms acting both as principals and as agents 
utilizing standardized swap documentation. As a result, the CDS market 
has become relatively liquid in comparison with the markets for other 
swaps which are traded in the over-the-counter (``OTC'') market, based 
upon the number of transactions and notional value.\14\ According to 
data published on The Depository Trust & Clearing Corporation 
(``DTCC'') Trade Information Warehouse Web site, over 2 million CDS 
contracts (including both single-name and multi-name products) have 
open positions.\15\ Recent data provided to the CFTC indicates daily 
transaction volumes of over 1500 transactions in CDS based on the 
family of CDX Indices.\16\ Overall, the CDS marketplace has almost $29 
trillion in notional dollar amount outstanding across both single and 
multi-name products.\17\ CDS on standardized indices (including the CDX 
Indices) accounts for about $10 trillion of the global OTC market in 
notional dollar amount outstanding.\18\ CDS market risk transaction 
activity, as measured by notional amount traded, increased 15% in the 
2013 period versus the 2012 period.\19\ Growth in notional volumes and 
trade counts related to new market transaction activity was driven by 
an increase in CDS index trading.\20\ The Adviser, under the 
supervision of the Trust's Board of Trustees, is responsible for 
determining and monitoring the liquidity of Fund transactions in swap 
agreements.
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    \14\ See 2013 ISDA Operations Benchmarking Survey, April 25, 
2013, at p. 4 (available at http://www2.isda.org/functional-areas/research/surveys/operations-benchmarking-surveys/).
    \15\ See DTCC Trade Information Warehouse credit derivatives 
data for the week ending 11-29-2013 (available at http://www.dtcc.com/products/derivserv/data_table_i.php).
    \16\ See ``Clearing Requirement Determination Under Section 2(h) 
of the CEA'', 77 FR 74284, 74294 (December 13, 2012).
    \17\ Id. See also, Bank for International Settlements survey on 
statistics on the OTC derivatives market as of November 7, 2013 
(also available at http://www.bis.org/statistics/otcder/dt1920a.pdf).
    \18\ Id.
    \19\ Based on market risk transaction activity (as measured by 
the volume of trading (using both transaction counts and notional 
amounts traded)) from the DTCC Trade Information Warehouse for the 
periods of February through July in 2011, 2012, and 2013. See CDS 
Market Summary: Market Risk Transaction Activity--ISDA Research 
Notes, October 2013 (available at http://www2.isda.org/attachment/NTk0MQ==/CDS%20Research%20Note%20final%202013-10-01.pdf).
    \20\ Id.
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    The use of swap agreements, including credit default swaps, is a 
highly specialized activity which involves investment techniques and 
risks different from those associated with ordinary portfolio 
securities transactions. If a counterparty's creditworthiness declines, 
the value of the swap would likely decline. Moreover, there is no 
guarantee that a Fund could eliminate its exposure under an outstanding 
swap agreement by entering into an offsetting swap agreement with the 
same or another party.
    To reduce the credit risk that arises in connection with 
investments in non-cleared swaps (as discussed below), each of the 
Funds will generally enter into an agreement with each counterparty 
based on a Master Agreement published by the International Swaps and 
Derivatives Association, Inc. (``ISDA'') that provides for the netting 
of its overall exposure to its counterparty. The Adviser will assess or 
review, as appropriate, the creditworthiness of each potential or 
existing counterparty to an OTC contract pursuant to guidelines 
approved by the Adviser. Furthermore, the Adviser on behalf of the 
Funds will only enter into OTC contracts with counterparties who are, 
or are affiliates of, (a) banks regulated by a United States federal 
bank regulator, (b) swap dealers or securities based swap dealers 
regulated by the CFTC and/or the Commission, (c) broker-dealers 
regulated by the Commission, or (d) insurance companies domiciled in 
the United States. Existing counterparties will be reviewed 
periodically by the Adviser. The Funds also may require that the 
counterparty be highly rated and/or provide collateral or other credit 
support.
Single Name CDS
    According to the Registration Statement, Single Name CDS are 
instruments that allow the buyer to purchase protection against a 
credit event such as a default on debt repayment obligations for a 
specific Reference Entity and a seller to guarantee protection against 
such event for the same entity. Because market perceptions about the 
risk of default, or another credit event, change over time, the prices 
of Single Name CDS for any given day are likely to change value. Bond 
prices also change in value over time and some of this change is due to 
changes in the strength of the underlying credit of the issuer. CDX 
Index swaps are created in order to provide exposure to the 
creditworthiness of a pre-designed market segment of the credit markets 
such as the investment grade debt market or the high yield debt market.
    In addition, in the event of a credit event under a CDS, including 
a CDS underlying the CDX Indices, the CDS would typically be cash 
settled via auction conducted under protocols published by ISDA, 
although physical settlement (i.e., an actual loan/bond

[[Page 2708]]

trade) is possible. Generally, the amount of the cash settlement is the 
difference between the market value of the Reference Entity debt 
obligation referred to in the CDS and the face value of the debt 
obligation, and that amount is payable by the protection seller to the 
protection buyer. The Funds intend to use cash settlement only and the 
Single Name CDS underlying the CDX Indices will be required to be cash 
settled.
    Ownership of a CDS can be transferred with the consent of the other 
party to the swap, or in the case of a cleared swap, the customer's 
futures commission merchant (``FCM'') to and in accordance with the 
relevant clearing organization regulations. There is a well-developed 
market for transfer of CDS, particularly cleared swaps, to third 
parties with the consent of the original parties to the swap (such 
transfers which require all parties' consent are commonly known as a 
novation). Obtaining such consent is not guaranteed and may result in a 
payment above the market value of the swap. Under such circumstances, 
the Adviser generally expects that it will enter into an offsetting 
cleared CDS to reduce or eliminate cleared swap positions rather than 
seek the consent of its counterparty for a transfer or early 
termination of a swap at a non-market price. The Adviser may unwind 
non-cleared CDS through termination or transfer of its position with a 
particular counterparty rather than enter into an offsetting trade with 
a second counterparty in order to avoid incurring additional credit 
exposure to the second counterparty and to avoid the possibility that 
values of the respective positions will differ, although it may enter 
into an offsetting transaction if the Adviser believes such a 
transaction is in the best interest of Fund shareholders. Each Fund 
will reduce the risk that it will be unable to close out a futures 
contract by only entering into futures contracts that are traded on a 
national futures exchange regulated by the CFTC.
    CDS are entered into among banks, securities firms, hedge funds, 
corporations, insurance companies, mutual funds, pension funds, and 
other institutional investors.\21\ CDS pricing is widely available to 
market participants in the equity and fixed income markets via Markit, 
Credit Market Analysis Ltd. (``CMA'') and Bloomberg L.P. 
(``Bloomberg''). Daily trading volume of cleared swaps transacted via 
the ICE Clear Credit LLC \22\ and CME Clearing \23\ clearing 
organizations is available through their respective Web sites. The 
Trust represents that, to its knowledge, no comprehensive information 
on weekly trading volume for non-cleared CDS is available, although 
ISDA does compile information about this market on an annual basis.\24\
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    \21\ The Adviser represents that the major dealer participants 
in the CDS/CDX Index swap market are: Bank of America; Barclays; BNP 
Paribas; Citibank; Credit Suisse; Deutsche Bank; Goldman Sachs; 
HSBC; JPMorgan; Morgan Stanley; Nomura; UBS; and Wells Fargo.
    \22\ ICE Clear Credit LLC is a subsidiary of the 
IntercontinentalExchange, Inc. (``ICE''). ICE Clear Credit LLC is 
registered with the CFTC as a clearing house for credit default 
swaps, including CDX Index swaps.
    \23\ CME Clearing is a division of Chicago Mercantile Exchange 
Inc. (``CME''), which is a subsidiary of the CME Group Inc. CME is 
registered with the CFTC as a clearing house for credit default 
swaps, including CDX Index swaps.
    \24\ Source: ISDA Market Surveys (http://www2.isda.org/functional-areas/research/surveys/market-surveys/).
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Margin and Collateral
    Cleared CDS are subject to initial and variation margin 
requirements set by the clearing organization that are based on mark-
to-market prices and other factors.\25\ In addition to this protection, 
additional initial margin may also be required by an FCM to address its 
credit exposure as guarantor to the clearing organization of the Funds' 
positions at the clearing organization throughout the life of the swap 
or futures contract.
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    \25\ The Funds intend to use ICE Clear Credit and CME Clearing 
as the clearing organizations for their cleared CDS. According to 
ICE Clear Credit, it employs a stress-based, five-factor methodology 
to determine the initial margin requirements. The main elements of 
the methodology are (i) liquidity and concentration requirements, 
(ii) basis risk requirements, (iii) jump-to-default requirements, 
(iv) risk factor spread response requirements, and (v) interest rate 
and recovery rate sensitivity requirements. According to CME 
Clearing, it determines initial margin requirements using a 
methodology that addresses six risk factors including overall risk 
of credit market, portfolio risk, idiosyncratic risk, and liquidity 
risk. Currently, ICE Clear Credit and CME Clearing determine margin 
on a net basis on a daily basis.
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    Subsequent to the payment of initial margin, variation margin is 
either payable by or returned to the Funds on a daily basis, based on 
the change in the value of the swap positions and the degree to which 
the Funds are in or out of the money with respect to their positions. 
The purpose of this is to minimize the credit exposure to the FCM and 
the clearing organization. If the Funds fail to post margin, the 
clearing organization can liquidate the Funds' positions. As such, the 
counterparty exposure is limited to the change in value since the last 
margin posted.
    In the case of non-cleared swaps, the 1940 Act requires that margin 
equal to the market value of the swap be posted and held by the Funds' 
custodian, The Bank of New York Mellon, on a daily basis. As with 
variation margin for cleared swaps, margin would be payable by or 
returned to the Funds based on the change in the value of the swap 
positions and the degree to which the Funds are in or out of the money 
with respect to their positions.
    Collateral or margin required to be provided for either cleared or 
non-cleared CDS will generally represent a small portion of such swap's 
aggregate notional value, and, accordingly, each Fund will generally 
invest the balance of its assets in obligations of the U.S. government, 
cash or cash equivalent assets. These assets will be available to 
satisfy subsequent margin calls on the Fund, as well as available for 
redemptions of Fund Shares and to pay its coupon or other payment 
obligations under its CDS.\26\
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    \26\ In addition to its margin payments to the protection 
seller, a protection buyer is required to pay an amount equal to the 
value of the CDS on the date acquired and thereafter must pay 
periodic fixed coupon payments determined by the clearing 
organization, in the case of cleared CDS, or as agreed to with its 
counterparties for non-cleared CDS.
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Principal Investments of the Funds
ETSpreads IG Long Credit Fund
    According to the Registration Statement, the investment objective 
of the Fund is to provide long exposure to the credit of a diversified 
portfolio of North American investment grade debt issuers. With respect 
to a particular credit market, a ``long position'' means that an 
investor expects that the issuers of debt securities in a particular 
debt market will be able to meet their obligations in accordance with 
the terms of such debt securities in full and on-time. The Fund will 
invest, under normal market conditions, substantially all of its assets 
in (i) CDS cleared by a clearing organization which are either (a) CDS 
index swaps based on multiple CDS relating to the debt issued by 
different Reference Entities, or (b) Single Name CDS based on CDS 
relating to the debt issued by a single Reference Entity; (ii) futures 
contracts based on CDS or other similar futures contracts; and (iii) 
U.S. Treasury securities, money market instruments, and cash. In order 
to gain exposure to the investment grade credit market, the Fund will 
normally be a net protection seller under its CDS, and will be required 
to make payments to the protection buyer when a specified adverse 
credit event occurs relating to a Reference Entity.
    If the Fund is successful in meeting its objective, its NAV should 
generally increase when the North American investment grade credit 
market is improving. Conversely, its NAV should

[[Page 2709]]

generally decrease when the North American investment grade credit 
market is deteriorating.
ETSpreads IG Short Credit Fund
    According to the Registration Statement, the investment objective 
of the Fund is to provide short exposure to the credit of a diversified 
portfolio of North American investment grade debt issuers. With respect 
to a particular credit market, a ``short position'' means that an 
investor expects there will be an increased likelihood that the issuers 
of debt securities in a particular debt market will not be able to meet 
their obligations in accordance with the terms of such debt securities 
in full or on-time. The Fund will invest, under normal market 
conditions, substantially all of its assets in (i) CDS cleared by a 
clearing organization which are either (a) CDS index swaps based on 
multiple CDS relating to the debt issued by different Reference 
Entities, or (b) Single Name CDS based on CDS relating to the debt 
issued by a single Reference Entity; (ii) futures contracts based on 
CDS or other similar futures contracts; and (iii) U.S. Treasury 
securities, money market instruments, and cash. In order to gain short 
exposure to the investment grade credit market, the Fund will normally 
be a net protection buyer under its CDS, and therefore will be required 
to make the ongoing payments specified under such contracts that 
represent the cost of purchasing protection from adverse credit events 
relating to a Reference Entity.
    If the Fund is successful in meeting its objective, its NAV should 
generally decrease as the North American investment grade credit market 
is improving. Conversely, its NAV should generally increase as the 
North American investment grade credit market is deteriorating.
ETSpreads HY Long Credit Fund
    According to the Registration Statement, the investment objective 
of the Fund is to provide long exposure to the credit (i.e., the 
likelihood that a borrower performs its payment obligations) of a 
diversified portfolio of North American high yield debt issuers. With 
respect to a particular credit market, a ``long position'' means that 
an investor expects that the issuers of debt securities in a particular 
debt market will be able to meet their obligations in accordance with 
the terms of such debt securities in full and on-time. The Fund will 
invest, under normal market conditions, substantially all of its assets 
in (i) CDS cleared by a clearing organization which are either (a) CDS 
index swaps based on multiple CDS relating to the debt issued by 
different Reference Entities, or (b) Single Name CDS based on CDS 
relating to the debt issued by a single Reference Entity; (ii) futures 
contracts based on CDS or other similar futures contracts; and (iii) 
U.S. Treasury securities, money market instruments, and cash. In order 
to gain exposure to the high yield credit market, the Fund will 
normally be a net protection seller under its CDS, i.e., it will be 
required to make payments to the protection buyer when a specified 
adverse credit event occurs relating to a Reference Entity.
    If the Fund is successful in meeting its objective, its NAV should 
generally increase when the North American high yield credit market is 
rallying, which means that credit quality is improving and differences 
or ``spreads'' between the returns on high yield debt securities 
generally and the returns on debt securities with comparable maturities 
that are essentially free of credit risk (such as U.S. Treasury 
securities) are decreasing or ``tightening.'' Conversely, its NAV 
should generally decrease when the North American high yield credit 
market is falling (going down), credit quality is deteriorating, and 
spreads are increasing or ``widening.''
ETSpreads HY Short Credit Fund
    According to the Registration Statement, the investment objective 
of the Fund is to provide short exposure to the credit of a diversified 
portfolio of North American high yield debt issuers. With respect to a 
particular credit market, a ``short position'' means that an investor 
expects there will be an increased likelihood that the issuers of debt 
securities in a particular debt market will not be able to meet their 
obligations in accordance with the terms of such debt securities in 
full or on-time. The Fund will invest, under normal market conditions, 
substantially all of its assets in (i) CDS cleared by a clearing 
organization which are either (a) CDS index swaps based on multiple CDS 
relating to the debt issued by different Reference Entities, or (b) 
Single Name CDS based on CDS relating to the debt issued by a single 
Reference Entity; (ii) futures contracts based on CDS or other similar 
futures contracts; and (iii) U.S. Treasury securities, money market 
instruments, and cash. In order to gain short exposure to the high 
yield credit market, the Fund will normally be a net protection buyer 
under its CDS, i.e., it will be required to make the ongoing payments 
specified under such contracts that represent the cost of purchasing 
protection from adverse credit events relating to a Reference Entity.
    If the Fund is successful in meeting its objective, its NAV should 
generally decrease when the North American high yield credit market is 
improving. Conversely, its NAV should generally increase as the North 
American high yield credit market is deteriorating.
Non-Principal Fund Investments
    While each Fund will invest, under normal market conditions, 
substantially all of its assets as described above under each Fund's 
principal investment strategies, each Fund may invest in, to the extent 
that CDS cleared by a clearing organization are not available, fully 
collateralized non-cleared CDS transactions \27\, and (i) to the extent 
available, options that are cleared through a clearing organization 
regulated or subject to the oversight of the CFTC or the Commission 
\28\ and (ii) if options cleared through a clearing organization are 
not available, fully collateralized non-cleared OTC options, in each 
case, relating to the following: options on CDS, options on CDS 
futures, options on CDS indexes and options on U.S. Treasury securities 
for bona fide hedging; attempting to offset changes in the value of its 
principal investments held or expected to be acquired or be disposed 
of; attempting to gain exposure to a particular market, index or 
instrument; or other risk management purposes.
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    \27\ The Adviser represents that each of the Funds' CDS 
transactions, whether cleared or uncleared, and the options 
described above will be subject to CFTC and/or Commission reporting, 
including the reporting of detailed transaction data to swap data 
repositories (``SDRs) subject to CFTC and/or the Commission 
oversight or regulation. See Swap Data Recordkeeping and Reporting 
Requirements, 77 F.R. 2136 (January 13, 2012). The Adviser 
represents that all swap transaction data, including data on 
options, will be available to the CFTC and the Commission and 
certain bank or other regulators. In addition, with certain 
exceptions (e.g., delays for large block trades), a portion of each 
CDS transaction's data will be available to major market data 
vendors on a real time, though anonymous, basis. See Real-Time 
Public Reporting of Swap Transaction Data, 77 F.R.1182 (January 9, 
2012).
    \28\ The Adviser represents that Fund transactions in options 
cleared through a clearing organization that have been designated by 
the CFTC or the Commission as ``made available to trade'' will be 
executed by the Funds on an exchange or on a swap execution facility 
subject to CFTC and/or Commission oversight or regulation.
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    Each Fund may also utilize other types of swap agreements, 
including, but not limited to, total return swaps on debt, equity or 
CDS or indexes relating to the foregoing, bond or corporate credit 
index swaps, and interest rate swaps. A Fund may utilize these swap 
agreements in an attempt to gain exposure to the investments used to 
meet its investment objective in a market without actually purchasing

[[Page 2710]]

those investments, or to hedge a position.
    Each Fund may invest in the securities of other investment 
companies consistent with the requirements of Section 12(d)(1) of the 
1940 Act, or any rule, regulation or order of the Commission or 
interpretation thereof.
    Each Fund may enter into repurchase agreements with financial 
institutions, which may be deemed to be loans. Each Fund follows 
certain procedures designed to minimize the risks inherent in such 
agreements. These procedures include effecting repurchase transactions 
only with large, well-capitalized and well-established financial 
institutions whose condition will be continually monitored by the 
Adviser. In addition, the value of the collateral underlying the 
repurchase agreement will always be at least equal to the repurchase 
price, including any accrued interest earned on the repurchase 
agreement.
The Benchmark Indices
    The Markit CDX North American Investment Grade 5-year Total Return 
Index is composed of credit default swaps relating to 125 equally-
weighted, investment grade, unaffiliated Reference Entities. All 
entities are domiciled in North America. A new series of the Index is 
issued every six months in March and September, which effectively 
serves as a rebalancing to reflect the then current corporate credit 
markets.
    The Markit CDX North American High Yield 5-year Total Return Index 
is composed of credit default swaps relating to 100 equally-weighted, 
non-investment grade, unaffiliated Reference Entities. All entities are 
domiciled in North America. A new series of the Index is issued every 
six months in March and September, which effectively serves as a 
rebalancing to reflect the then current corporate credit markets.
Benchmark Methodology and Construction
    Markit Group Limited (``Markit'') has developed and published 
specific rules for each Index, most recently updated on March 2013 in 
the publicly available ``Markit CDX High Yield & Markit CDX Investment 
Grade Index Rules'' \29\ (the ``Rules'').
---------------------------------------------------------------------------

    \29\ http://www.markit.com/assets/en/docs/products/data/indices/credit-index-annexes/Markit%20CDX%20HY%20and%20IG%20Rules%20Mar%202013.pdf
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    The composition of an Index shall be determined by Markit as the 
``Administrator'' in accordance with the Rules, which are formulaic, 
provided that in making any determination the Administrator may depart 
from, or otherwise make an exception to, the Rules. Generally, the 
composition of membership in each Index is determined by selecting 
unique Reference Entities with the most liquid credit derivatives based 
on trailing six-month trading volume published on DTCC Trade 
Information Warehouse. Once a series of an Index is issued, no 
additional companies are added to the Index as component members of 
such Index.
    Component members of an Index may be removed under certain 
circumstances, including a credit event such as a default. When a new 
series of an Index is released every six months, the component members 
of an Index are updated to reflect changes in the markets and the new 
component members are approved by the Administrator and published on 
Markit's Web site.
    Each Reference Entity has an equal weighting in the applicable CDX 
Index. A list of Reference Entities for the CDX Indices is published 
from time to time by or on behalf of Markit.
Other Fund Characteristics
    Each of the Funds may hold up to an aggregate amount of 15% of its 
net assets in illiquid investments (calculated at the time of 
investment) in accordance with Commission staff guidance. The Funds 
will monitor their portfolio liquidity on an ongoing basis to determine 
whether, in light of current circumstances, an adequate level of 
liquidity is being maintained, and will take appropriate steps in order 
to maintain adequate liquidity if, through a change in values, net 
assets, or other circumstances, more than 15% of a Fund's net assets 
are held in illiquid investments. Illiquid investments include 
investments subject to contractual or other restrictions on resale and 
other instruments that lack readily available markets as determined in 
accordance with Commission staff guidance.\30\
---------------------------------------------------------------------------

    \30\ The Commission has stated that long-standing Commission 
guidelines have required open-end funds to hold no more than 15% of 
their net assets in illiquid securities and other illiquid assets. 
See Investment Company Act Release No. 28193 (March 11, 2008), 73 FR 
14618 (March 18, 2008), footnote 34. See also, Investment Company 
Act Release No. 5847 (October 21, 1969), 35 FR 19989 (December 31, 
1970) (Statement Regarding ``Restricted Securities''); Investment 
Company Act Release No. 18612 (March 12, 1992), 57 FR 9828 (March 
20, 1992) (Revisions of Guidelines to Form N-1A). A fund's portfolio 
security is illiquid if it cannot be disposed of in the ordinary 
course of business within seven days at approximately the value 
ascribed to it by the fund. See Investment Company Act Release No. 
14983 (March 12, 1986), 51 FR 9773 (March 21, 1986) (adopting 
amendments to Rule 2a-7 under the 1940 Act); Investment Company Act 
Release No. 17452 (April 23, 1990), 55 FR 17933 (April 30, 1990) 
(adopting Rule 144A under the Securities Act of 1933).
---------------------------------------------------------------------------

    The Funds will not invest in any equity securities except for 
investment company securities.
    The Funds will be non-diversified, which means that a Fund may 
invest its assets in a smaller number of issuers than a diversified 
fund.\31\
---------------------------------------------------------------------------

    \31\ The diversification standard is set forth in Section 
5(b)(1) of the 1940 Act.
---------------------------------------------------------------------------

    Each of the Funds' investments, including derivatives, will be 
consistent with its investment objective.
Net Asset Value
    The NAV per Share of a Fund will be computed by dividing the value 
of the net assets of the Fund (i.e., the value of its total assets less 
total liabilities) by the total number of Shares of the Fund 
outstanding, rounded to the nearest cent. Expenses and fees, including 
without limitation, the management, administration and distribution 
fees, will be accrued daily and taken into account for purposes of 
determining NAV per Share. The NAV per Share for a Fund will be 
calculated by The Bank of New York Mellon and determined as of the 
close of the regular trading session on the Exchange (ordinarily 4:00 
p.m., Eastern Time (``E.T.'')) on each day that the Exchange is open.
    In computing a Fund's NAV, a Fund's holdings will be valued based 
on their last readily available market price. Price information on 
listed investments will be taken from the exchange where the investment 
is primarily traded. The Adviser intends to use clearing organization 
settlement prices, e.g., Markit ICE Settlement Prices or CME Clearing 
CDS Settlement Prices (determined as of 4:00 p.m. E.T.) for the 
valuation of its CDS. The Adviser will use the closing prices on the 
relevant futures exchanges (determined at the earlier of the close of 
such futures exchanges or 4:00 p.m.) for the valuation of its futures 
contracts based on CDS or other similar futures contracts. The Adviser 
intends to use clearing organization settlement prices for the 
valuation of its options that are cleared through a clearing 
organization regulated or subject to the oversight of the CFTC or the 
Commission. Money market instruments and U.S. Treasury securities will 
be valued based on price quotations or other equivalent indications of 
value provided by a third-party pricing service.
    The Adviser will calculate or determine the value of all other 
investments using market quotations, if available, from third-party 
pricing

[[Page 2711]]

services or brokers and dealers, as described below. With respect to 
non-cleared CDS and OTC options, to the extent that agreement is 
reached with any counterparties on pricing methodologies for 
determining end-of-day settlement prices, the Adviser will use such 
information for purposes of determining the asset's value. Accordingly, 
the Funds plan to use this and other end of day pricing data provided 
by third parties, as described under Availability of Information below, 
for purposes of determining their respective NAVs. Total return swaps, 
bond or corporate credit index swaps and interest rate swaps will 
normally be valued on the basis of quotes obtained from brokers and 
dealers or third-party pricing services. The Adviser will use the 
latest NAV published by the investment company and major market data 
vendors as of 4:00 p.m. E.T. for the valuation of its investment 
company security investments, other than shares of exchange-listed 
investment company securities. Shares of exchange-listed investment 
company securities will be valued at market value, which will generally 
be determined using the last reported official closing or last trading 
price on the exchange or market on which the securities are primarily 
traded at the time of valuation. Repurchase agreements will be valued 
based on price quotations or other equivalent indications of value 
provided by a third-party pricing service. Other portfolio securities 
and assets for which market quotations are not readily available or 
determined to not represent the current fair value will be valued based 
on fair value as determined in good faith by the Adviser in accordance 
with procedures adopted by the Board of Trustees and with the 1940 Act.
Purchases and Redemptions of Creation Units
    According to the Registration Statement, each Fund will offer and 
sell Creation Units through the Distributor on a continuous basis at 
the NAV next determined after an order in proper form is received by 
the Distributor. The NAV of each Fund will be determined as of the 
close of regular trading on the NYSE Arca (ordinarily 4:00 p.m. E.T.) 
on each business day. Each Fund will sell and redeem Creation Units 
only on a business day. A Creation Unit will consist of at least 50,000 
Shares; however, the size of a Creation Unit may change in the future.
    Shares will be purchased and redeemed in Creation Units. The Funds 
will generally sell and redeem Creation Units entirely for cash to the 
extent permissible under the Trust's Exemptive Application and 
Exemptive Order.
    In the case of in-kind purchases and redemptions of Creation Units, 
purchasers will be required to purchase Creation Units by making an in-
kind deposit of specified instruments (``Deposit Instruments''), and 
shareholders redeeming their Shares will receive an in-kind transfer of 
specified instruments (``Redemption Instruments'').\32\ On any given 
business day, the names and quantities of the instruments that 
constitute the Deposit Instruments and the names and quantities of the 
instruments that constitute the Redemption Instruments will be 
identical, and these instruments may be referred to, in the case of 
either a purchase or a redemption, as the ``Creation Basket.'' In 
addition, generally, the Creation Basket will correspond pro rata to 
the positions in a Fund's portfolio (including CDS and cash positions).
---------------------------------------------------------------------------

    \32\ The Funds must comply with the federal securities laws in 
accepting Deposit Instruments and satisfying redemptions with 
Redemption Instruments, including that the Deposit Instruments and 
Redemption Instruments are sold in transactions that would be exempt 
from registration under the Securities Act. In accepting Deposit 
Instruments and satisfying redemptions with Redemption Instruments 
that are restricted securities eligible for resale pursuant to rule 
144A under the Securities Act, the Funds will comply with the 
conditions of Rule 144A.
---------------------------------------------------------------------------

    If there is a difference between the NAV attributable to a Creation 
Unit and the aggregate market value of the Creation Basket exchanged 
for the Creation Unit, the party conveying instruments with the lower 
value will also pay to the other an amount in cash equal to that 
difference (the ``Cash Amount''). In addition, in the event a Deposit 
Instrument included in a Creation Basket cannot be transferred or 
novated, the market value of that instrument will be paid and added to 
the Cash Amount.
    As an actively managed fund, the allocation of a Fund's investments 
may change over time. Generally, it is not expected that a Fund's 
allocation of investments will change significantly over the course of 
a day in a manner that would significantly impact an intra-day hedging 
strategy. Authorized Participants and market makers have a wide variety 
of instruments that they could utilize to hedge their intraday market 
exposure, including corporate bonds, U.S. Treasuries, CDS, and 
exchange-traded funds, including other Funds in the Trust that have an 
investment objective that is inverse to that of a Fund whose Share 
value is being hedged.
    In connection with creations or redemptions for cash, it is 
expected each Fund will announce before the open of trading each 
business day that all purchases and all redemptions on that day will be 
made entirely in cash. On each business day, before the open of trading 
on the Exchange, each Fund will cause to be published through the 
National Securities Clearing Corporation (``NSCC'') the names and 
quantities of the instruments comprising the Creation Basket, as well 
as the estimated Cash Amount (if any), for that day. The published 
Creation Basket will apply until a new Creation Basket is announced on 
the following business day, and there will be no intra-day changes to 
the Creation Basket except to correct error(s) in the Creation Basket 
discovered after publication through the NSCC.
Placement of Orders To Purchase Creation Units
    All orders to purchase Creation Units must be placed with the 
Distributor by or through an ``Authorized Participant,'' which is 
either (i) a ``Participating Party,'' i.e., a broker or other 
participant in the Continuous Net Settlement System (``CNS System'') of 
the NSCC (``NSCC Process''), a clearing agency registered with the 
Commission and affiliated with The Depository Trust Company (``DTC'') 
or (ii) a DTC Participant, which, in either case, has executed a 
``Participant Agreement'' with the Distributor with respect to the 
purchase and redemption of Creation Units.
    All orders to purchase (and redeem) Creation Units must be received 
by the Distributor in proper form one hour prior to the NAV calculation 
time (``NAV Calculation Time''), which is generally at 4:00 p.m. E.T. 
(meaning that orders must be received by 3:00 p.m.) on the business day 
the order is placed in order for the purchaser to receive the NAV 
determined on that date (``Transmittal Date''). On business days that 
the Exchange closes early, a Fund may require an order for the purchase 
of Creation Units to be submitted earlier during the day.
Placement of Orders To Redeem Creation Units
    Redemption requests must be placed by or through an Authorized 
Participant. All orders to redeem Creation Units of a Fund must be 
received by the Distributor in proper form no later than one hour prior 
to the NAV Calculation Time on the Transmittal Date in order for the 
redeeming investor to receive the

[[Page 2712]]

Fund's NAV determined on the Transmittal Date.
Portfolio Indicative Value
    The Portfolio Indicative Value (``PIV'') as defined in NYSE Arca 
Equities Rule 8.600(c)(3) of Shares of each Fund will be widely 
disseminated by one or more major market data vendors at least every 
fifteen seconds during the Exchange's Core Trading Session.\33\ An 
unaffiliated third-party retained by the Trust (the ``Calculation 
Agent'') will calculate the PIV throughout the trading day for each 
Fund by (i) calculating the marked-to-market gains/losses of CDS and 
all other financial instruments held by a Fund on the basis described 
below, (ii) calculating the value of a Fund's cash, cash equivalents, 
U.S. Treasury securities and other assets, (iii) adding the marked-to-
market gains and losses on the financial instruments and the value of 
the other assets of the Fund to arrive at an asset value, and (iv) 
dividing that asset value by the total Shares outstanding to obtain a 
current PIV.
---------------------------------------------------------------------------

    \33\ Currently, it is the Exchange's understanding that several 
major market data vendors widely disseminate PIVs taken from the 
Consolidated Tape Association (``CTA'') or other data feeds.
---------------------------------------------------------------------------

    Gains and losses on CDS will be determined for purposes of 
calculating the PIV based on market quotations regularly received from 
third-party subscription services.\34\ These quotations may include 
prices at which transactions were actually executed, ``executable 
quotations,'' which provide a firm price at which the dealer would buy 
or sell a specified notional amount of CDS, and ``indicative 
quotations,'' which, while not necessarily executable, provide an 
indication of the price at which such dealer would buy or sell a 
specified notional amount. The Funds will not be involved in, or 
responsible for, the calculation or dissemination of any such amount 
and will make no warranty as to its accuracy.
---------------------------------------------------------------------------

    \34\ Dealer quotations on a particular CDS will typically be 
provided notwithstanding a default by a Reference Entity under that 
swap. The price at which the CDS will be bought or sold will be 
affected by such a default.
---------------------------------------------------------------------------

Availability of Information
    The Funds' Web site (http://www.etspreads.com), which will be 
publicly available prior to the public offering of Shares, will include 
a form of the prospectus for the Funds that may be downloaded. The Web 
site will include additional quantitative information updated on a 
daily basis, including, for each Fund, (1) daily trading volume, the 
prior business day's reported closing price, NAV and mid-point of the 
bid/ask spread at the time of calculation of such NAV (the ``Bid/Ask 
Price''),\35\ and a calculation of the premium and discount of the Bid/
Ask Price against the NAV, and (2) data in chart format displaying the 
frequency distribution of discounts and premiums of the daily Bid/Ask 
Price against the NAV, within appropriate ranges, for each of the four 
previous calendar quarters. On each business day, before commencement 
of trading in Shares in the Core Trading Session on the Exchange, the 
Funds will disclose on the Web site the Disclosed Portfolio as defined 
in proposed Rule 8.600(c)(2) that will form the basis for the Funds' 
calculation of NAV at the end of the business day.\36\ The Web site 
information will be publicly available at no charge.
---------------------------------------------------------------------------

    \35\ The Bid/Ask Price of Fund Shares will be determined using 
mid-point of the highest bid and the lowest offer on the Exchange as 
of the time of calculation of a Fund's NAV. The records relating to 
Bid/Ask Prices will be retained by the Funds and their service 
providers.
    \36\ Under accounting procedures followed by the Funds, trades 
made on the prior business day (``T'') will be booked and reflected 
in NAV on the current business day (``T+1''). Accordingly, the Funds 
will be able to disclose at the beginning of the business day the 
portfolio that will form the basis for the NAV calculation at the 
end of the business day.
---------------------------------------------------------------------------

    On a daily basis, the Adviser will disclose on behalf of each Fund 
each portfolio holding and financial instrument of a Fund the following 
information: Ticker symbol (if applicable), name of security and 
financial instrument, number of shares, if applicable, and dollar value 
of securities and financial instruments held in the portfolio, and 
percentage weighting of the holding and financial instrument in the 
portfolio. The Web site information will be publicly available at no 
charge. Market participants, particularly large institutional 
investors, regularly receive executable and indicative quotations on 
CDS from dealers. In addition, intra-day and end-of-day prices for all 
Single Name CDS, CDS index swaps, or other financial instruments held 
by a Fund will be available through major market data vendors or 
broker-dealers or on the exchanges on which they are traded. Major 
market vendors which provide intra-day and end-of-day prices for both 
Single Name CDS and CDS index swaps include Markit, CMA and Bloomberg. 
Bloomberg, Thomson Reuters Corporation (``Thomson Reuters'') and 
similar data vendors provide intra-day and end-of-day pricing data for 
U.S. Treasury securities and money market instruments. Exchanges which 
provide intraday and end-of-day prices for futures and options on 
futures include ICE Futures and CME Group. Broker-dealers provide 
intraday and end-of-day prices for non-cleared swaps and options, 
including options on Single Name CDS and options on CDS index swaps.
    ICE Clear Credit LLC and CME Clearing provide daily price and 
transaction information for swaps that it or its affiliate clears by 
subscription to its members and other market participants. 
Additionally, pricing intraday regarding various CDS index swaps is 
provided free to the public, with a fifteen minute delay, on the Markit 
Web site (https://source.markit.com). Daily trading volume of cleared 
swaps transacted via the ICE Clear Credit LLC and CME Clearing clearing 
organizations is also available through their respective Web sites.
    Another source of intra-day information about Single Name CDS 
prices is the market for OTC corporate bonds on which the CDS are 
based, and the Adviser requests that there is a significant amount of 
information available about the intra-day pricing of corporate bonds 
and the amount of such information is increasing. Because CDS represent 
the credit risk component of corporate bonds, and the effect of 
interest rate changes on the prices of corporate bonds is readily 
calculable, market professionals are able to obtain substantial 
information about the intra-day value of CDS based on data on the 
intra-day value of the underlying corporate bonds. While short-term 
variations between the bond and CDS markets do arise, and may occur 
more frequently when such markets are volatile, the value of the 
underlying debt securities is important and useful in valuing related 
CDS.
    One source of bond price information is the Financial Industry 
Regulatory Authority's (``FINRA'') Trace Reporting and Compliance 
System (``TRACE''). TRACE reports executed prices on corporate bonds, 
including high-yield bond transactions. TRACE reported prices are 
available without charge on the FINRA Web site on a ``real time'' basis 
(subject to a fifteen minute delay) and also are available by 
subscription from various information providers (e.g., Bloomberg). In 
addition, authorized participants and other market participants, 
particularly those that regularly deal or trade in corporate bonds, 
have access to intra-day corporate bond prices from a variety of 
sources other than TRACE, such as Thomson Reuters, Interactive Data and 
MarketAxess.
    The intraday, closing and settlement prices of U.S. Treasury 
securities,

[[Page 2713]]

money market instruments and repurchase agreements will be readily 
available from published or other public sources, or major market data 
vendors such as Bloomberg and Thomson Reuters. Price information 
regarding exchange-traded options is available from the exchanges on 
which such instruments are traded and from Market Data Express's (an 
affiliate of Chicago Board Options Exchange) Customized Option Pricing 
Service. Price information regarding OTC options is available from 
major market data vendors. ICE Futures provides end-of-day prices for 
CDS futures or other similar futures contracts. Intra-day and closing 
price information for shares of exchange-listed investment company 
securities are available from the exchange on which such securities are 
principally traded and from major market data vendors. The NAV of any 
investment company security investment will be readily available on the 
Web site of the relevant investment company and from major market data 
vendors. Major market data vendors also provide intra-day and end-of-
day prices for total return swaps, bond or corporate credit index 
swaps, and interest rate swaps.
    Investors can also obtain the Trust's Statement of Additional 
Information (``SAI''), the Fund's Shareholder Reports, and its Form N-
CSR and Form N-SAR, filed twice a year. The Trust's SAI and Shareholder 
Reports are available free upon request from the Trust, and those 
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or 
downloaded from the Commission's Web site at http://www.sec.gov. 
Information regarding market price and trading volume of the Shares 
will be continually available on a real-time basis throughout the day 
on brokers' computer screens and other electronic services. Information 
regarding the previous day's closing price and trading volume 
information may be published daily in the financial section of 
newspapers. Quotation and last sale information for the Shares and 
exchange-traded investment company securities will be available via the 
CTA high-speed line. In addition, the PIV, as defined in NYSE Arca 
Equities Rule 8.600(c)(3), will be disseminated at least every 15 
seconds during the Core Trading Session by one or more major market 
data vendors. The dissemination of the PIV, together with the Disclosed 
Portfolio, will allow investors to determine the value of the 
underlying portfolio of a Fund on a daily basis and to provide a close 
estimate of that value throughout the trading day.
    Additional information regarding the Shares and the Funds, 
including investment strategies, risks, creation and redemption 
procedures, fees, portfolio holdings disclosure policies, distributions 
and taxes, is contained in the Registration Statement. All terms 
relating to the Funds that are referred to, but not defined in, this 
proposed rule change are defined in the Registration Statement or the 
Exemptive Application.
Trading Halts
    With respect to trading halts, the Exchange may consider all 
relevant factors in exercising its discretion to halt or suspend 
trading in the Shares of a Fund.\37\ Trading in Shares of a Fund 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. These may include: (1) The extent to 
which trading is not occurring in the holdings and/or the financial 
instruments comprising the Disclosed Portfolio of a Fund; or (2) 
whether other unusual conditions or circumstances detrimental to the 
maintenance of a fair and orderly market are present. Trading in the 
Shares will be subject to NYSE Arca Equities Rule 8.600(d)(2)(D), which 
sets forth circumstances under which Shares of a Fund may be halted.
---------------------------------------------------------------------------

    \37\ See NYSE Arca Equities Rule 7.12.
---------------------------------------------------------------------------

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. in accordance with 
NYSE Arca Equities Rule 7.34 (Opening, Core, and Late Trading 
Sessions). 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 Shares will conform to the initial and continued listing 
criteria under Rule 8.600. The Exchange represents that, for initial 
and/or continued listing, the Funds will be in compliance with Rule 
10A-3 \38\ under the Act, as provided by NYSE Arca Equities Rule 5.3. A 
minimum of 100,000 Shares for each Fund will be outstanding at the 
commencement of trading on the Exchange. The Exchange will obtain a 
representation from the issuer of the Shares that the NAV and the 
Disclosed Portfolio will be made available to all market participants 
at the same time.
---------------------------------------------------------------------------

    \38\ 17 CFR 240.10A-3.
---------------------------------------------------------------------------

Surveillance
    The Exchange represents that trading in the Shares will be subject 
to the existing trading surveillances, administered by the FINRA's on 
behalf of the Exchange, which are designed to detect violations of 
Exchange rules and applicable federal securities laws.\39\ 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 federal securities laws 
applicable to trading on the Exchange.
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    \39\ FINRA surveils trading on the Exchange pursuant to a 
regulatory services agreement. The Exchange is responsible for 
FINRA's performance under this regulatory services agreement.
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    The surveillances referred to above generally focus on detecting 
securities trading outside their normal patterns, which could be 
indicative of manipulative or other violative activity. 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.
    FINRA, on behalf of the Exchange, will communicate as needed 
regarding trading in the Shares, futures, exchange-listed options and 
exchange-listed investment company securities with other markets and 
other entities that are members of the Intermarket Surveillance Group 
(``ISG''), and FINRA, on behalf of the Exchange, may obtain trading 
information regarding trading in the Shares, futures, exchange-listed 
options and exchange-listed investment company securities from such 
markets and other entities. In addition, the Exchange may obtain 
information regarding trading in the Shares, futures, exchange-listed 
options and exchange-listed investment company securities from markets 
and other entities that are members of ISG or with which the Exchange 
has in place a comprehensive surveillance sharing agreement.\40\ FINRA, 
on behalf of the Exchange, is able to access, as needed, trade

[[Page 2714]]

information for certain fixed income securities held by the Funds 
reported to FINRA's TRACE.
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    \40\ For a list of the current members of ISG, see 
www.isgportal.org. The Exchange notes that not all components of the 
Disclosed Portfolio for the Funds may trade on markets that are 
members of ISG or with which the Exchange has in place a 
comprehensive surveillance sharing agreement.
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    In addition, 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 (``Bulletin'') of the special 
characteristics and risks associated with trading the Shares. 
Specifically, the Bulletin will discuss the following: (1) The 
procedures for purchases and redemptions of Shares in Creation Unit 
aggregations (and that Shares are not individually redeemable); (2) 
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; (3) the risks involved in trading 
the Shares during the Opening and Late Trading Sessions when an updated 
PIV will not be calculated or publicly disseminated; (4) how 
information regarding the PIV is disseminated; (5) 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 (6) trading information.
    In addition, the Bulletin will reference that the Funds are subject 
to various fees and expenses described in the Registration Statement. 
The Bulletin will discuss any exemptive, no-action, and interpretive 
relief granted by the Commission from any rules under the Act. The 
Bulletin will also disclose that the NAV for the Shares will be 
calculated after 4:00 p.m. E.T. each trading day.
2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under Section 6(b)(5) \41\ 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.
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    \41\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed rule change is designed to 
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 
8.600. To meet its respective investment objective, under normal market 
conditions, each Fund intends to invest substantially all of its assets 
in (i) CDS cleared by a clearing organization which are either (a) CDS 
index swaps, including CDX Index swaps, based on multiple CDS relating 
to the debt issued by different Reference Entities, or (b) Single Name 
CDS; (ii) futures contracts based on CDS or other similar futures 
contracts, and (iii) U.S. Treasury securities, money market 
instruments, and cash. 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. FINRA, on behalf of the 
Exchange, will communicate as needed regarding trading in the Shares, 
futures, exchange-listed options and exchange-listed investment company 
securities with other markets and other entities that are members of 
the ISG, and FINRA, on behalf of the Exchange, may obtain trading 
information regarding trading in the Shares, futures, exchange-listed 
options and exchange-listed investment company securities from such 
markets and other entities. In addition, the Exchange may obtain 
information regarding trading in the Shares, futures, exchange-listed 
options and exchange-listed investment company securities from markets 
and other entities that are members of ISG or with which the Exchange 
has in place a comprehensive surveillance sharing agreement.
    The proposed rule change is designed to promote just and equitable 
principles of trade and to protect investors and the public interest in 
that the Adviser is affiliated with a broker-dealer and has represented 
that it has implemented a fire wall with respect to its broker-dealer 
affiliate regarding access to information concerning the composition 
and/or changes to the applicable portfolio. Information regarding 
market price and trading volume of the Shares will be continually 
available on a real-time basis throughout the day on brokers' computer 
screens and other electronic services. Pricing and market information 
for CDS (including CDX Index swaps) is available by subscription and 
information on pricing is distributed on Bloomberg and other similar 
resources. ICE Clear Credit LLC provides daily price and transaction 
information by subscription to its members and other market 
participants. Additionally, pricing intraday regarding CDX Index swaps 
is provided free to the public, with a fifteen minute delay, on the 
Markit Web site. Market participants regularly receive executable and 
indicative quotations on CDS from dealers. Authorized participants and 
other market participants can also obtain CDS prices by subscription 
from third parties through on-line services. Another source of intra-
day information about CDS prices is the market for OTC corporate bonds 
on which the CDS are based. Information regarding the previous day's 
closing price and trading volume information may be published daily in 
the financial section of newspapers. Quotation and last sale 
information for the Shares and exchange-traded investment company 
securities will be available via the CTA high-speed line. In addition, 
the PIV, as defined in NYSE Arca Equities Rule 8.600(c)(3), will be 
disseminated at least every 15 seconds during the Core Trading Session 
by one or more major market data vendors. On each business day, each 
Fund will disclose on its Web site the Disclosed Portfolio that will 
form the basis for a Fund's calculation of NAV at the end of the 
business day. The Exchange will obtain a representation from the issuer 
of the Shares that the NAV per Share will be calculated daily and that 
the NAV and the Disclosed Portfolio will be made available to all 
market participants at the same time. Trading in Shares of a Fund 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, and trading in the Shares will be subject to NYSE Arca 
Equities Rule 8.600(d)(2)(D), which sets forth circumstances under 
which Shares of a Fund may be halted. In addition, as noted above, 
investors will have ready access to information regarding the Fund's 
holdings, the PIV, the Disclosed Portfolio, and quotation and last sale 
information for the Shares.
    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

[[Page 2715]]

information regarding the Fund's holdings, the PIV, the Disclosed 
Portfolio, 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 purpose of the Act. The Exchange notes that the 
proposed rule change will facilitate the listing and trading of 
actively-managed exchange-traded products that are based on swaps 
indexes and that will enhance competition among market participants, to 
the benefit of investors and the marketplace.

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 after 
publication (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 email to rule-comments@sec.gov. Please 
include File Number SR-NYSEArca-2013-144 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-2013-144. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NYSEArca-2013-144 and should 
be submitted on or before February 5, 2014.
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    \42\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\42\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-00605 Filed 1-14-14; 8:45 am]
BILLING CODE 8011-01-P


