
[Federal Register Volume 79, Number 40 (Friday, February 28, 2014)]
[Notices]
[Pages 11486-11491]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-04389]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71606; File No. SR-NYSEArca-2013-122]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Instituting 
Proceedings To Determine Whether To Approve or Disapprove Proposed Rule 
Change Relating to the Use of Derivative Instruments by PIMCO Total 
Return Exchange Traded Fund

February 24, 2014.

I. Introduction

    On November 6, 2013, 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 relating to the use of derivative 
instruments by the PIMCO Total Return Exchange Traded Fund (``Fund''). 
The proposed rule change was published for comment in the Federal 
Register on November 26, 2013.\3\ The Commission received no comment 
letters on the proposed rule change. On January 9, 2014, pursuant to 
Section 19(b)(2) of the Act,\4\ the Commission designated a longer 
period within which to either approve the proposed rule change, 
disapprove the proposed rule change, or institute proceedings to 
determine whether to disapprove the proposed rule change.\5\ This order 
institutes

[[Page 11487]]

proceedings under Section 19(b)(2)(B) of the Act \6\ to determine 
whether to approve or disapprove the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 70905 (November 20, 
2013), 78 FR 70610 (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ Securities Exchange Act Release No. 71271 (January 9, 2014), 
79 FR 2736 (January 15, 2014). The Commission determined that it was 
appropriate to designate a longer period within which to take action 
on the proposed rule change so that it has sufficient time to 
consider the proposed rule change. Accordingly, the Commission 
designated February 24, 2014 as the date by which it should approve, 
disapprove, or institute proceedings to determine whether to 
disapprove the proposed rule change.
    \6\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

II. Description of the Proposal

    The Commission approved the listing and trading on the Exchange of 
shares (``Shares'') of the Fund \7\ under NYSE Arca Equities Rule 
8.600, which governs the listing and trading of Managed Fund Shares. 
The Shares are offered by PIMCO ETF Trust (``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.\8\ 
The investment manager to the Fund is Pacific Investment Management 
Company LLC (``PIMCO'' or ``Adviser''). The Exchange proposes to change 
the description of the Fund's use of derivative instruments, as 
described below.
---------------------------------------------------------------------------

    \7\ See Securities Exchange Act Release No. 66321 (February 3, 
2012), 77 FR 6850 (February 9, 2012) (SR-NYSEArca-2011-95) (``Prior 
Order''). See also Securities Exchange Act Release No. 65988 
(December 16, 2011), 76 FR 79741 (December 22, 2011) (SR-NYSEArca-
2011-95) (``Prior Notice,'' and together with the Prior Order, 
collectively, ``Prior Release'').
    \8\ The Trust is registered under the Investment Company Act of 
1940 (``1940 Act''). The Exchange states that on October 29, 2012 
the Trust filed with the Commission the most recent post-effective 
amendment to its registration statement under the Securities Act of 
1933 (``1933 Act'') and under the 1940 Act relating to the Fund 
(File Nos. 333-155395 and 811-22250) (``Registration Statement''). 
The Exchange further states that the Trust has obtained an order 
granting certain exemptive relief under the 1940 Act. See Investment 
Company Act Release No. 28993 (November 10, 2009) (File No. 812-
13571) (``Exemptive Order'').
---------------------------------------------------------------------------

    On December 6, 2012, the staff of the Commission's Division of 
Investment Management issued a no-action letter (``No-Action Letter'') 
relating to the use of derivatives by actively-managed exchange traded 
funds (``ETFs'').\9\ The No-Action Letter noted that, in March of 2010, 
the Commission announced in a press release that the staff was 
conducting a review to evaluate the use of derivatives by mutual funds, 
ETFs, and other investment companies and that, pending completion of 
this review, the staff would defer consideration of exemptive requests 
under the 1940 Act relating to, among others, actively-managed ETFs 
that would make significant investments in derivatives.
---------------------------------------------------------------------------

    \9\ See No-Action Letter dated December 6, 2012 from Elizabeth 
G. Osterman, Associate Director, Office of Exemptive Applications, 
Division of Investment Management, Commission.
---------------------------------------------------------------------------

    The No-Action Letter stated that Division of Investment Management 
staff will no longer defer consideration of exemptive requests under 
the 1940 Act relating to actively-managed ETFs that make use of 
derivatives provided that they include representations to address some 
of the concerns expressed in the Commission's March 2010 press release. 
These representations are: (i) That the ETF's board periodically will 
review and approve the ETF's use of derivatives and how the ETF's 
investment adviser assesses and manages risk with respect to the ETF's 
use of derivatives; and (ii) that the ETF's disclosure of its use of 
derivatives in its offering documents and periodic reports is 
consistent with relevant Commission and staff guidance. The No-Action 
Letter stated that the Division of Investment Management would not 
recommend enforcement action to the Commission under sections 2(a)(32), 
5(a)(1), 17(a), 22(d), and 22(e) of the 1940 Act, or rule 22c-1 under 
the 1940 Act if actively-managed ETFs operating in reliance on 
specified orders (which include the Trust's Exemptive Order) \10\ 
invest in options contracts, futures contracts, or swap agreements 
provided that they comply with the representations stated in the No-
Action Letter, as noted above.
---------------------------------------------------------------------------

    \10\ See supra note 8.
---------------------------------------------------------------------------

    In the Prior Release, the Exchange stated that, consistent with the 
Trust's Exemptive Order, the Fund would not invest in options 
contracts, futures contracts, or swap agreements. In view of the No-
Action Letter, the Exchange is proposing to change this representation 
to permit the Fund to use derivative instruments, as described 
below.\11\
---------------------------------------------------------------------------

    \11\ The Adviser represents that the Fund, in connection with 
its use of derivative instruments, will comply with the 
representations stated in the No-Action Letter, as noted above.
---------------------------------------------------------------------------

    The Prior Release stated that the Fund will invest under normal 
market circumstances at least 65% of its total assets in a diversified 
portfolio of Fixed Income Instruments of varying maturities.\12\ 
``Fixed Income Instruments'' include bonds, debt securities, and other 
similar instruments issued by various U.S. and non-U.S. public- or 
private-sector entities.\13\ The Exchange proposes to revise this 
statement to provide that the Fund will invest under normal market 
circumstances at least 65% of its total assets in a diversified 
portfolio of Fixed Income Instruments of varying maturities, which may 
be represented by derivatives related to Fixed Income Instruments 
(``65% policy'').
---------------------------------------------------------------------------

    \12\ As stated in the Prior Release, the term ``under normal 
market circumstances'' includes, but is not limited to, the absence 
of extreme volatility or trading halts in the fixed income markets 
or the financial markets generally; operational issues causing 
dissemination of inaccurate market information; or force majeure 
type events such as systems failure, natural or man-made disaster, 
act of God, armed conflict, act of terrorism, riot or labor 
disruption, or any similar intervening circumstance.
    \13\ As noted in the Prior Release, ``Fixed Income 
Instruments,'' as such term is used generally in the Registration 
Statement, include: Debt securities issued or guaranteed by the U.S. 
Government, its agencies or government-sponsored enterprises; 
corporate debt securities of U.S. and non-U.S. issuers, including 
convertible securities and corporate commercial paper; mortgage-
backed and other asset-backed securities; inflation-indexed bonds 
issued both by governments and corporations; structured notes, 
including hybrid or ``indexed'' securities and event-linked bonds; 
bank capital and trust preferred securities; loan participations and 
assignments; delayed funding loans and revolving credit facilities; 
bank certificates of deposit, fixed time deposits, and bankers' 
acceptances; repurchase agreements on Fixed Income Instruments and 
reverse repurchase agreements on Fixed Income Instruments; debt 
securities issued by states or local governments and their agencies, 
authorities, and other government-sponsored enterprises; obligations 
of non-U.S. governments or their subdivisions, agencies, and 
government-sponsored enterprises; and obligations of international 
agencies or supranational entities. Securities issued by U.S. 
Government agencies or government-sponsored enterprises may not be 
guaranteed by the U.S. Treasury.
---------------------------------------------------------------------------

    The Prior Release stated that the Fund's investment would not be 
used to enhance leverage. In view of the Exchange's proposal to permit 
the Fund to use derivative instruments, as described below, the Fund's 
investments in derivative instruments may be used to enhance leverage. 
However, as noted in the Prior Release, the Fund's investments will not 
be used to seek performance that is the multiple or inverse multiple 
(e.g., 2x or 3x) of the Fund's broad-based securities market index.

The Fund's Use of Derivatives

    According to the Exchange, with respect to the Fund, derivative 
instruments primarily will include forwards, exchange-traded and over-
the-counter (``OTC'') options contracts, exchange-traded futures 
contracts, options on futures contracts, and swap agreements. 
Generally, derivatives are financial contracts whose value depends 
upon, or is derived from, the value of an underlying asset, reference 
rate, or index, and may relate to stocks, bonds, interest rates, 
currencies or currency exchange rates, commodities, and related 
indexes. The Exchange states that the Fund may, but is not required to, 
use derivative instruments for risk management purposes or as part of 
its investment strategies.\14\
---------------------------------------------------------------------------

    \14\ The Fund will seek, where possible, to use counterparties 
whose financial status is such that the risk of default is reduced; 
however, the risk of losses resulting from default is still 
possible. PIMCO's Counterparty Risk Committee evaluates the 
creditworthiness of counterparties on an ongoing basis. In addition 
to information provided by credit agencies, PIMCO credit analysts 
evaluate each approved counterparty using various methods of 
analysis, including company visits, earnings updates, the broker-
dealer's reputation, PIMCO's past experience with the broker-dealer, 
market levels for the counterparty's debt and equity, the 
counterparty's liquidity, and its share of market participation.

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

[[Page 11488]]

    The Exchange represents that the Fund's investments in derivative 
instruments will be made in accordance with the 1940 Act and consistent 
with the Fund's investment objective and policies. The Exchange states 
that the Fund will typically use derivative instruments as a substitute 
for taking a position in the underlying asset and/or as part of a 
strategy designed to reduce exposure to other risks, such as interest 
rate or currency risk. The Fund may also use derivative instruments to 
enhance returns. According to the Exchange, to limit the potential risk 
associated with such transactions, the Fund will segregate or 
``earmark'' assets determined to be liquid by PIMCO in accordance with 
procedures established by the Trust's Board of Trustees and in 
accordance with the 1940 Act (or, as permitted by applicable 
regulation, enter into certain offsetting positions) to cover its 
obligations under derivative instruments. These procedures have been 
adopted consistent with Section 18 of the 1940 Act and related 
Commission guidance. In addition, the Exchange states that the Fund 
will include appropriate risk disclosure in its offering documents, 
including leveraging risk. Leveraging risk is the risk that certain 
transactions of the Fund, including the Fund's use of derivatives, may 
give rise to leverage, causing the Fund to be more volatile than if it 
had not been leveraged.\15\ Because the markets for certain securities, 
or the securities themselves, may be unavailable or cost prohibitive as 
compared to derivative instruments, suitable derivative transactions 
may be an efficient alternative for the Fund to obtain the desired 
asset exposure.
---------------------------------------------------------------------------

    \15\ To mitigate leveraging risk, the Adviser will segregate or 
``earmark'' liquid assets or otherwise cover the transactions that 
may give rise to such risk.
---------------------------------------------------------------------------

    The Adviser believes that derivatives can be an economically 
attractive substitute for an underlying physical security that the Fund 
would otherwise purchase. For example, the Fund could purchase Treasury 
futures contracts instead of physical Treasuries or could sell credit 
default protection on a corporate bond instead of buying a physical 
bond. Economic benefits include potentially lower transaction costs or 
attractive relative valuation of a derivative versus a physical bond 
(e.g., differences in yields).
    The Adviser further believes that derivatives can be used as a more 
liquid means of adjusting portfolio duration as well as targeting 
specific areas of yield curve exposure, with potentially lower 
transaction costs than the underlying securities (e.g., interest rate 
swaps may have lower transaction costs than physical bonds). Similarly, 
money market futures can be used to gain exposure to short-term 
interest rates in order to express views on anticipated changes in 
central bank policy rates. In addition, derivatives can be used to 
protect client assets through selectively hedging downside (or ``tail 
risks'') in the Fund.
    According to the Exchange, the Fund also can use derivatives to 
increase or decrease credit exposure. Index credit default swaps (CDX) 
can be used to gain exposure to a basket of credit risk by ``selling 
protection'' against default or other credit events, or to hedge broad 
market credit risk by ``buying protection.'' Single name credit default 
swaps (CDS) can be used to allow the Fund to increase or decrease 
exposure to specific issuers, saving investor capital through lower 
trading costs. The Fund can use total return swap contracts to obtain 
the total return of a reference asset or index in exchange for paying a 
financing cost. A total return swap may be much more efficient than 
buying underlying securities of an index, potentially lowering 
transaction costs.
    The Adviser believes that the use of derivatives will allow the 
Fund to selectively add diversifying sources of return from selling 
options. Option purchases and sales can also be used to hedge specific 
exposures in the portfolio, and can provide access to return streams 
available to long-term investors such as the persistent difference 
between implied and realized volatility. Option strategies can generate 
income or improve execution prices (i.e., covered calls).

Other Investments

    In addition to the Fund's use of derivatives in connection with the 
65% policy, under the proposal the Fund would seek to invest in 
derivative instruments not based on Fixed Income Instruments, 
consistent with the Fund's investment restrictions relating to exposure 
to those asset classes.
    The Prior Release also stated that the Fund may invest in debt 
securities and instruments that are economically tied to foreign (non-
U.S.) countries. The Prior Release stated further that PIMCO generally 
considers an instrument to be economically tied to a non-U.S. country 
if the issuer is a foreign government (or any political subdivision, 
agency, authority, or instrumentality of such government), or if the 
issuer is organized under the laws of a non-U.S. country. In the case 
of applicable money market instruments, such instruments will be 
considered economically tied to a non-U.S. country if either the issuer 
or the guarantor of such money market instrument is organized under the 
laws of a non-U.S. country.
    The Exchange proposes to add to this representation that, with 
respect to derivative instruments, as proposed to be used, PIMCO 
generally will consider such instruments to be economically tied to 
non-U.S. countries if the underlying assets are foreign currencies (or 
baskets or indexes of such currencies), or instruments or securities 
that are issued by foreign governments (or any political subdivision, 
agency, authority, or instrumentality of such governments) or issuers 
organized under the laws of a non-U.S. country (or if the underlying 
assets are money market instruments, as applicable, if either the 
issuer or the guarantor of such money market instruments is organized 
under the laws of a non-U.S. country).
    The Fund's investments, including investments in derivative 
instruments, are subject to all of the restrictions under the 1940 Act, 
including restrictions with respect to illiquid securities. The Fund 
may hold up to an aggregate amount of 15% of its net assets in illiquid 
securities (calculated at the time of investment), including Rule 144A 
securities deemed illiquid by the Adviser,\16\ consistent with 
Commission guidance. The Fund will monitor its portfolio liquidity on 
an ongoing basis to determine whether, in light of current 
circumstances, an adequate level of liquidity is being maintained, and 
will consider taking appropriate steps in order to maintain adequate 
liquidity if, through a change in values, net assets, or other 
circumstances, more than 15% of the Fund's net assets are held in 
illiquid securities. Illiquid securities include securities subject to 
contractual or other restrictions on resale and other instruments that 
lack readily available markets as determined in accordance with 
Commission staff guidance.
---------------------------------------------------------------------------

    \16\ In reaching liquidity decisions with respect to Rule 144A 
securities, the Adviser may consider the following factors: The 
frequency of trades and quotes for the security; the number of 
dealers willing to purchase or sell the security and the number of 
other potential purchasers; dealer undertakings to make a market in 
the security; and the nature of the security and the nature of the 
marketplace trades (e.g., the time needed to dispose of the 
security, the method of soliciting offers, and the mechanics of 
transfer).

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

[[Page 11489]]

    The Exchange states that the changes described herein will be 
effective upon (i) the effectiveness of an amendment to the Trust's 
Registration Statement disclosing the Fund's intended use of derivative 
instruments, and (ii) when this proposed rule change has become 
operative. The Adviser represents that it has managed and will continue 
to manage the Fund in the manner described in the Prior Release, and 
will not implement the changes described herein until this proposed 
rule change is operative.
    The Adviser represents that there is no change to the Fund's 
investment objective and that the Fund will continue to comply with all 
initial and continued listing requirements under NYSE Arca Equities 
Rule 8.600. Except for the changes noted above, all other facts 
presented and representations made in the Prior Release remain 
unchanged.

Derivatives Valuation Methodology for Purposes of Determining Net Asset 
Value

    The Exchange states that the net asset value (``NAV'') of the 
Fund's Shares is determined by dividing the total value of the Fund's 
portfolio investments and other assets, less any liabilities, by the 
total number of Shares outstanding. Fund Shares are valued as of the 
close of regular trading (normally 4:00 p.m., Eastern time (``E.T.'')) 
(``NYSE Close'') on each day NYSE Arca is open (``Business Day''). 
Information that becomes known to the Fund or its agents after the NAV 
has been calculated on a particular day will not generally be used to 
retroactively adjust the price of a portfolio asset or the NAV 
determined earlier that day. The Fund reserves the right to change the 
time its NAV is calculated if the Fund closes earlier, or as permitted 
by the Commission.
    According to the Exchange, for purposes of calculating NAV, 
portfolio securities and other assets for which market quotes are 
readily available are valued at market value. Market value is generally 
determined on the basis of last reported sales prices, or if no sales 
are reported, based on quotes obtained from a quotation reporting 
system, established market makers, or pricing services. Domestic and 
foreign fixed income securities and non-exchange-traded derivatives 
will normally be valued on the basis of quotes obtained from brokers 
and dealers or pricing services using data reflecting the earlier 
closing of the principal markets for those assets. Prices obtained from 
independent pricing services use information provided by market makers 
or estimates of market values obtained from yield data relating to 
investments or securities with similar characteristics. Exchange-traded 
options, futures, and options on futures will generally be valued at 
the settlement price determined by the applicable exchange.
    Derivatives for which market quotes are readily available will be 
valued at market value. Local closing prices will be used for all 
instrument valuation purposes.
    For the Fund's 4:00 p.m. E.T. futures holdings, estimated prices 
from Reuters will be used if any cumulative futures margin impact is 
greater than $0.005 to the NAV due to futures movement after the fixed 
income futures market closes (3:00 p.m. E.T.) and up to the NYSE Close 
(generally 4:00 p.m. E.T.). Swaps traded on exchanges such as the 
Chicago Mercantile Exchange or the Intercontinental Exchange will use 
the applicable exchange closing price where available.

Derivatives Valuation Methodology for Purposes of Determining Intra-day 
Indicative Value

    According to the Exchange, on each Business Day, before 
commencement of trading in Fund Shares on NYSE Arca, the Fund discloses 
on its Web site the identities and quantities of the portfolio 
instruments and other assets held by the Fund that will form the basis 
for the Fund's calculation of NAV at the end of the Business Day. In 
order to provide additional information regarding the intra-day value 
of Shares of the Fund, NYSE Arca or a market data vendor disseminates 
every 15 seconds through the facilities of the Consolidated Tape 
Association or other widely disseminated means an updated Intra-day 
Indicative Value (``IIV'') for the Fund as calculated by an information 
provider or market data vendor.
    The Exchange states that a third party market data provider is 
currently calculating the IIV for the Fund. For the purposes of 
determining the IIV, the third party market data provider's valuation 
of derivatives is expected to be similar to their valuation of all 
securities. The third party market data provider may use market quotes 
if available or may fair value securities against proxies (such as swap 
or yield curves).
    According to the Exchange, with respect to specific derivatives:
     Foreign currency derivatives may be valued intraday using 
market quotes, or another proxy as determined to be appropriate by the 
third party market data provider.
     Futures may be valued intraday using the relevant futures 
exchange data, or another proxy as determined to be appropriate by the 
third party market data provider.
     Interest rate swaps may be mapped to a swap curve and 
valued intraday based on changes of the swap curve, or another proxy as 
determined to be appropriate by the third party market data provider.
     CDX/CDS may be valued using intraday data from market 
vendors, or based on underlying asset price, or another proxy as 
determined to be appropriate by the third party market data provider.
     Total return swaps may be valued intraday using the 
underlying asset price, or another proxy as determined to be 
appropriate by the third party market data provider.
     Exchange listed options may be valued intraday using the 
relevant exchange data, or another proxy as determined to be 
appropriate by the third party market data provider.
     OTC options may be valued intraday through option 
valuation models (e.g., Black-Scholes) or using exchange traded options 
as a proxy, or another proxy as determined to be appropriate by the 
third party market data provider.

Disclosed Portfolio

    The Exchange states that the Fund's disclosure of derivative 
positions in the Disclosed Portfolio will include information that 
market participants can use to value these positions intraday. This 
information will vary by line item, and may include tickers or other 
identifiers which would identify the listing or clearing exchange for 
exchange-traded and cleared derivatives, strike price(s), underlying 
asset, swap or index, coupon, effective date, maturity, and quantities 
or exposure. For example, a Treasury future would require only a 
ticker/identifier and quantity. An OTC option may require underlying 
asset or swap details, strike price, quantity, and expiration date. For 
the avoidance of doubt, exchange-traded and cleared derivatives will be 
identified by ticker or other identifiers which would identify the 
listing or clearing exchange for those instruments.

Impact on Arbitrage Mechanism

    The Adviser believes there will be minimal, if any, impact to the 
arbitrage mechanism as a result of the use of derivatives. Market 
makers and participants should be able to value derivatives as long as 
the positions are disclosed with relevant information. The Adviser 
believes that the price at which Shares trade will continue to be

[[Page 11490]]

disciplined by arbitrage opportunities created by the ability to 
purchase or redeem creation Shares at their NAV, which should ensure 
that Shares will not trade at a material discount or premium in 
relation to their NAV.
    The Adviser does not believe there will be any significant impacts 
to the settlement or operational aspects of the Fund's arbitrage 
mechanism due to the use of derivatives. Because derivatives generally 
are not eligible for in-kind transfer, they will typically be 
substituted with a ``cash in lieu'' amount when the Fund processes 
purchases or redemptions of creation units in-kind.

Surveillance

    The Exchange represents that trading in the Shares will be subject 
to the existing trading surveillances, administered by the Financial 
Industry Regulatory Authority (``FINRA'') on behalf of the Exchange, 
which are designed to detect violations of Exchange rules and 
applicable federal securities laws.\17\ The Exchange represents that 
these procedures are adequate to properly monitor Exchange trading of 
the Shares in all trading sessions and to deter and detect violations 
of Exchange rules and applicable federal securities laws.
---------------------------------------------------------------------------

    \17\ 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.
---------------------------------------------------------------------------

    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, exchange traded options, futures, and 
options on futures with other markets or other entities that are 
members of the Intermarket Surveillance Group (``ISG''), and FINRA may 
obtain trading information regarding trading in the Shares, exchange 
traded options, futures, and options on futures from such markets or 
entities. In addition, the Exchange may obtain information regarding 
trading in the Shares, exchange traded options, futures, and options on 
futures from markets or other entities that are members of ISG or with 
which the Exchange has in place a comprehensive surveillance sharing 
agreement.\18\ In addition, FINRA, on behalf of the Exchange, is able 
to access, as needed, trade information for certain fixed income 
securities held by the Fund reported to FINRA's Trade Reporting and 
Compliance Engine. In addition, the Exchange states that it has a 
general policy prohibiting the distribution of material, non-public 
information by its employees.
---------------------------------------------------------------------------

    \18\ 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 Fund may trade on markets that are 
members of ISG or with which the Exchange has in place a 
comprehensive surveillance sharing agreement.
---------------------------------------------------------------------------

    Additional information regarding the Trust, the Fund, and the 
Shares, including investment strategies, risks, creation and redemption 
procedures, fees, portfolio holdings disclosure policies, 
distributions, and taxes, among other things, is included in the Notice 
and Registration Statement, as applicable.\19\
---------------------------------------------------------------------------

    \19\ See Notice and Registration Statement, supra notes 3 and 8, 
respectively.
---------------------------------------------------------------------------

III. Proceedings To Determine Whether To Approve or Disapprove SR-
NYSEArca-2013-122 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \20\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of such 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the proposed rule change, as discussed below. 
Institution of proceedings does not indicate that the Commission has 
reached any conclusions with respect to any of the issues involved. 
Rather, as described below, the Commission seeks and encourages 
interested persons to provide additional comment on the proposed rule 
change.
---------------------------------------------------------------------------

    \20\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

    Pursuant to Section 19(b)(2)(B) of the Act,\21\ the Commission is 
providing notice of the grounds for disapproval under consideration. In 
particular, Section 6(b)(5) of the Act \22\ requires, among other 
things, that the rules of a national securities exchange be 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 a national market system 
and, in general, to protect investors and the public interest; and not 
be designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
---------------------------------------------------------------------------

    \21\ Id.
    \22\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    As discussed above, under the proposal, the Fund would seek to 
invest, under normal market circumstances, at least 65% of its total 
assets in a diversified portfolio of Fixed Income Instruments of 
varying maturities, which may be represented by derivative instruments 
based on Fixed Income Instruments.\23\ With respect to the Fund, 
derivative instruments primarily will include forwards, exchange-traded 
and OTC options contracts, exchange-traded futures contracts and 
options on futures contracts, and swap agreements. In addition to the 
Fund's use of derivative instruments in connection with the 65% policy, 
under the proposal, the Fund would seek to invest in derivative 
instruments that are not based on Fixed Income Instruments, consistent 
with the Fund's investment restrictions relating to exposure to those 
asset classes.\24\ In the Notice, the Exchange included a description 
of the information that would be made available about the derivative 
positions in the Disclosed Portfolio. Also in the Notice, the Exchange 
discussed the impact of the proposal on the arbitrage mechanism and its 
surveillance of the listing and trading of the Shares on the Exchange.
---------------------------------------------------------------------------

    \23\ See supra note 13.
    \24\ In the Prior Release, the Exchange described the Fund's 
permitted investments in Fixed Income Instruments and assets other 
than Fixed Income Instruments and noted that the Fund would be 
subject to certain investment restrictions (in addition to the 
diversification requirements and restrictions relating to illiquid 
securities, among others, under the 1940 Act). Such investment 
restrictions include the following: (a) The Fund may invest up to 
15% of its total assets in securities and instruments that are 
economically tied to emerging market countries; (b) the Fund will 
normally limit its foreign currency exposure (from non-U.S. dollar-
denominated securities or currencies) to 20% of its total assets; 
(c) the Fund may invest up to 10% of its total assets in preferred 
stock, convertible securities and other equity related securities; 
and (d) the Fund will not invest in any non-U.S registered equity 
securities, except if such securities are traded on exchanges that 
are members of ISG. See Prior Release, supra note 7. In addition, 
the Commission notes that specifically with respect to the Fund's 
investments in Fixed Income Instruments, the Exchange represented in 
the Prior Release that the Fund would be subject to the following 
investment restrictions: (i) The Fund will invest primarily (under 
normal market circumstances, at least 65% of its total assets) in 
investment-grade Fixed Income Instruments, but may invest up to 10% 
of its total assets in high yield Fixed Income Instruments; and (ii) 
while corporate debt securities and debt securities economically 
tied to an emerging market country generally must have $200 million 
or more par amount outstanding and significant par value traded to 
be considered as an eligible investment for the Fund, at least 80% 
of issues of such securities held by the Fund must have $200 million 
or more par amount outstanding. See id.
---------------------------------------------------------------------------

    The Commission solicits comment on whether the proposal is 
consistent with

[[Page 11491]]

the Exchange Act and whether the Exchange has sufficiently met its 
burden in presenting a statutory analysis of how its proposal is 
consistent with the Exchange Act. In particular, the grounds for 
disapproval under consideration include whether the Exchange's proposal 
is consistent with Section 6(b)(5) of the Exchange Act, which requires, 
among other things, that the rules of a national securities exchange be 
``designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade,'' and ``to protect 
investors and the public interest.'' \25\ The Commission continues to 
evaluate the sufficiency of the information that would be available 
regarding the pricing of the OTC derivative instruments included in the 
Disclosed Portfolio, and the impact on the ability of investors and 
other market participants to value the Fund's holdings, and to engage 
in arbitrage and hedging activities.
---------------------------------------------------------------------------

    \25\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
concerns identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposal is 
consistent with Section 6(b)(5) or any other provision of the Act, or 
the rules and regulations thereunder. Although there do not appear to 
be any issues relevant to approval or disapproval which would be 
facilitated by an oral presentation of views, data, and arguments, the 
Commission will consider, pursuant to Rule 19b-4, any request for an 
opportunity to make an oral presentation.\26\
---------------------------------------------------------------------------

    \26\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
---------------------------------------------------------------------------

    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by March 21, 2014. Any person who wishes to file a rebuttal 
to any other person's submission must file that rebuttal by April 4, 
2014.
    The Commission asks that commenters address the sufficiency and 
merit of the Exchange's statements in support of the proposal, in 
addition to any other comments they may wish to submit about the 
proposed rule change. In particular, the Commission seeks comment on 
the following:
    1. The Exchange states, in the proposed rule change, that the 
Fund's disclosure of derivative positions in the Disclosed Portfolio 
will include information that market participants can use to value the 
derivatives positions intraday, and that this information will vary by 
line item, and may include tickers or other identifiers which would 
identify the listing or clearing exchange for exchange-traded and 
cleared derivatives, strike price(s), underlying asset, swap or index, 
coupon, effective date, maturity, and quantities or exposure. The 
Exchange further states that market makers and participants should be 
able to value derivatives as long as the positions are disclosed with 
relevant information. Do commenters agree? Why or why not? What type of 
information is necessary to be included in the information to be made 
available about the Disclosed Portfolio for market participants to be 
able to value the derivatives positions intraday?
    2. The Exchange states that the Adviser believes there will be 
minimal, if any, impact to the arbitrage mechanism as a result of the 
use of derivatives. Do commenters agree? Why or why not?
    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-2013-122 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 Numbers SR-NYSEArca-2013-122. 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 such filings also will be available 
for inspection and copying at the principal office of the Exchanges. 
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-
122 and should be submitted on or before March 21, 2014. Rebuttal 
comments should be submitted by April 4, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
Kevin M. O'Neill,
Deputy Secretary.
---------------------------------------------------------------------------

    \27\ 17 CFR 200.30-3(a)(57).
---------------------------------------------------------------------------

[FR Doc. 2014-04389 Filed 2-27-14; 8:45 am]
BILLING CODE 8011-01-P


