
[Federal Register Volume 79, Number 91 (Monday, May 12, 2014)]
[Notices]
[Pages 27023-27028]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-10772]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72099; File No. SR-BATS-2014-007]


Self-Regulatory Organizations; BATS Exchange, Inc.; Order 
Granting Approval of a Proposed Rule Change To List and Trade Shares of 
Certain Funds of the ProShares Trust

May 6, 2014.

I. Introduction

    On March 13, 2014, BATS Exchange, Inc. (``Exchange'' or ``BATS'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to list and trade shares (``Shares'') of certain 
funds of the ProShares Trust (``Trust'') under BATS Rule 14.11(i). The 
proposed rule change was published for comment in the Federal Register 
on March 24, 2014.\3\ The Commission received no comments on the 
proposal. This order grants approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 71736 (March 18, 
2014), 79 FR 16073 (``Notice'').
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II. Description of the Proposal

    The Exchange proposes to list and trade the Shares of the ProShares 
CDS North American HY Credit ETF, ProShares CDS Short North American HY 
Credit ETF, ProShares CDS North American IG Credit ETF, ProShares CDS 
Short North American IG Credit ETF, ProShares CDS European HY Credit 
ETF, ProShares CDS Short European HY Credit ETF, ProShares CDS European 
IG Credit ETF, and the ProShares CDS Short European IG Credit ETF 
(individually, ``Fund,'' and collectively, ``Funds'') under BATS Rule 
14.11(i), which governs the listing and trading of Managed Fund Shares 
on the Exchange. The Shares will be offered by the Trust, which was 
established as a Delaware statutory trust on May 29, 2002. The Trust is 
registered with the Commission as an open-end investment company and 
has filed a registration statement on behalf of the Funds on Form N-1A 
(``Registration Statement'') with the Commission.\4\ ProShare Advisors 
LLC is the investment adviser (``Adviser'') to the Funds. JPMorgan 
Chase Bank, National Association is the administrator, custodian, fund 
account agent, index receipt agent, and transfer agent for the Trust. 
SEI Investments Distribution Co. serves as the distributor for the 
Trust. The Exchange represents that the Adviser is not a registered 
broker-dealer, but is currently affiliated with a broker-dealer, and 
that Adviser personnel who make decisions regarding the Funds' 
portfolios are subject to procedures designed to prevent the use and 
dissemination of material, non-public information regarding the Funds' 
portfolios.\5\
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    \4\ See Registration Statement on Form N-1A for the Trust, dated 
May 31, 2013 (File Nos. 333-89822 and 811-21114). See also 
Investment Company Act Release No. 30562 (June 18, 2013) (File No. 
812-14041).
    \5\ See BATS Rule 14.11(i)(7). The Exchange further represents 
that in the event that (a) the Adviser becomes a broker-dealer or 
newly affiliated with a broker-dealer, or (b) any new adviser or 
sub-adviser is a broker-dealer or becomes affiliated with a broker-
dealer, it will implement a fire wall with respect to its relevant 
personnel or such broker-dealer affiliate, as applicable, regarding 
access to information concerning the composition and changes to the 
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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    The Exchange has made the following representations and statements 
in describing the Funds and their

[[Page 27024]]

respective investment strategies, including other portfolio holdings 
and investment restrictions.\6\
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    \6\ The Commission notes that additional information regarding 
the Trust, the Funds, and the Shares, including information on 
credit default swaps, in particular, investment strategies, risks, 
net asset value (``NAV'') calculation, creation and redemption 
procedures, portfolio holdings, disclosure policies, distributions 
and taxes, among other information, is included in the Notice and 
the Registration Statement, as applicable. See Notice and 
Registration Statement, supra notes 3 and 4, respectively.
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Description of the Funds

    The Funds will be actively managed funds that seek to provide 
exposure (or inverse exposure) to the credit of a segment of the fixed 
income markets by selecting a broadly diversified, liquid credit 
derivative portfolio.

A. Principal Investments

    To meet its respective investment objective, under normal market 
circumstances,\7\ each Fund intends to invest at least 80% of its net 
assets in centrally cleared, index-based credit default swaps 
(``CDS'').\8\ The Exchange represents that the Funds will be structured 
to address concerns regarding counterparty risk and the use of leverage 
in CDS. To limit counterparty risk, the Funds will utilize centrally 
cleared CDS contracts. In addition, the Funds will seek to obtain only 
non-leveraged long or short credit exposure, as applicable (i.e., 
exposure equivalent to Fund assets).
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    \7\ The term ``under normal circumstances'' includes, but is not 
limited to, the absence of adverse market, economic, political, or 
other conditions, including extreme volatility or trading halts in 
the CDS markets, the related futures markets, or the financial 
markets generally; operational issues causing dissemination of 
inaccurate market information; or force majeure type events such as 
systems failure, natural or man-made disaster, act of God, armed 
conflict, act of terrorism, riot or labor disruption, or any similar 
intervening circumstance.
    \8\ CDS provide exposure to the credit of one or more debt 
issuers referred to as ``reference entities.'' These instruments are 
designed to reflect changes in credit quality, including events of 
default. CDS are most commonly discussed in terms of buying or 
selling credit protection with respect to a reference entity. 
Selling credit protection is equivalent to being ``long'' credit. 
Buying credit protection is equivalent to being ``short'' credit. 
Index-based CDS provide credit exposure, through a single trade, to 
a basket of reference entities. A variety of index-based CDS with 
different characteristics are currently available in the marketplace 
with new issuances occurring periodically. Issuances typically vary 
in terms of underlying reference entities and maturity and, thus, 
can have significant differences in performance over time. As with 
exchange-traded futures contracts, holders of centrally cleared 
swaps do have counterparty risk relative to their Futures Commission 
Merchant (``FCM''). The Funds will select one or more large, well-
capitalized institutions to act as their FCM.
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ProShares CDS North American HY Credit ETF

    The investment objective of the Fund is to provide long exposure to 
credit by investing primarily in a broadly diversified, liquid 
portfolio of index-based CDS for which the reference entities are North 
American high yield (i.e., below investment grade or ``junk bond'') 
debt issuers. The Fund seeks to increase in value when the North 
American high yield credit market improves (i.e., the likelihood of 
payment by North American high yield debt issuers increases), while 
also seeking to limit the impact of a change in the credit quality of 
any single high yield debt issuer. To achieve its objective, the Fund 
will invest, under normal circumstances, at least 80% of its net assets 
in centrally cleared index-based CDS. The Adviser intends to utilize 
CDS to sell credit protection, thus obtaining long exposure to North 
American high yield credit. The Fund's investments in CDS will be 
consistent with the Fund's investment objective and will not be used to 
create leverage. The Fund will seek to obtain long credit exposure 
equivalent to its assets and will not provide leveraged exposure to 
credit.
    The Adviser will actively manage the Fund, selecting credit 
derivatives based on the following primary considerations: 
Diversification; liquidity; and sensitivity to changes in credit 
quality. The Adviser may, at times, also consider other factors such as 
the relative value of one credit derivative versus another. The Fund 
will typically have exposure to individual sectors to the same extent 
as the index-based instruments in which it invests.

ProShares CDS Short North American HY Credit ETF

    The investment objective of the Fund is to provide inverse exposure 
to credit by investing primarily in a broadly diversified, liquid 
portfolio of index-based CDS for which the reference entities are North 
American high yield (i.e., below investment grade or ``junk bond'') 
debt issuers. The Fund seeks to increase in value when the North 
American high yield credit market declines (i.e., the likelihood of 
payment by North American high yield debt issuers decreases), while 
also seeking to limit the impact of a change in the credit quality of 
any single high yield debt issuer. To achieve its objective, the Fund 
will invest, under normal circumstances, at least 80% of its net assets 
in centrally cleared index-based CDS. The Adviser intends to utilize 
CDS to buy credit protection, thus obtaining inverse exposure to North 
American high yield credit. The Fund's investments in CDS will be 
consistent with the Fund's investment objective and will not be used to 
create leverage. The Fund will seek to obtain short credit exposure 
equivalent to its assets and will not provide leveraged exposure to 
credit.
    The Adviser will actively manage the Fund, selecting credit 
derivatives based on the following primary considerations: 
Diversification; liquidity; and sensitivity to changes in credit 
quality. The Adviser may, at times, also consider other factors such as 
the relative value of one credit derivative versus another. The Fund 
will typically have exposure to individual sectors to the same extent 
as the index-based instruments in which it invests.

ProShares CDS North American IG Credit ETF

    The investment objective of the Fund is to provide long exposure to 
credit by investing primarily in a broadly diversified, liquid 
portfolio of index-based CDS for which the reference entities are North 
American investment grade debt issuers. The Fund seeks to increase in 
value when the North American investment grade credit market improves 
(i.e., the likelihood of payment by North American investment grade 
debt issuers increases), while also seeking to limit the impact of a 
change in the credit quality of any single investment grade debt 
issuer. To achieve its objective, the Fund will invest, under normal 
circumstances, at least 80% of its net assets in centrally cleared 
index-based CDS. The Adviser intends to utilize CDS to sell credit 
protection, thus obtaining exposure to North American investment grade 
credit. The Fund's investments in CDS will be consistent with the 
Fund's investment objective and will not be used to create leverage. 
The Fund will seek to obtain long credit exposure equivalent to its 
assets and will not provide leveraged exposure to credit.
    The Adviser will actively manage the Fund, selecting credit 
derivatives based on the following primary considerations: 
Diversification; liquidity; and sensitivity to changes in credit 
quality. The Adviser may, at times, also consider other factors such as 
the relative value of one credit derivative versus another. The Fund 
will typically have exposure to individual sectors to the same extent 
as the index-based instruments in which it invests.

[[Page 27025]]

ProShares CDS Short North American IG Credit ETF

    The investment objective of the Fund is to provide inverse exposure 
to credit by investing primarily in a broadly diversified, liquid 
portfolio of index-based CDS for which the reference entities are North 
American investment grade debt issuers. The Fund seeks to increase in 
value when the North American investment grade credit market declines 
(i.e., the likelihood of payment by North American investment grade 
debt issuers decreases), while also seeking to limit the impact of a 
change in the credit quality of any single investment grade debt 
issuer. To achieve its objective, the Fund will invest, under normal 
circumstances, at least 80% of its net assets in centrally cleared 
index-based CDS. The Adviser intends to utilize CDS to buy credit 
protection, thus obtaining inverse exposure to North American 
investment grade credit. The Fund's investments in CDS will be 
consistent with the Fund's investment objective and will not be used to 
create leverage. The Fund will seek to obtain short credit exposure 
equivalent to its assets and will not provide leveraged exposure to 
credit.
    The Adviser will actively manage the Fund, selecting credit 
derivatives based on the following primary considerations: 
Diversification; liquidity; and sensitivity to changes in credit 
quality. The Adviser may, at times, also consider other factors such as 
the relative value of one credit derivative versus another. The Fund 
will typically have exposure to individual sectors to the same extent 
as the index-based instruments in which it invests.

ProShares CDS European HY Credit ETF

    The investment objective of the Fund is to provide long exposure to 
credit by investing primarily in a broadly diversified, liquid 
portfolio of index-based CDS for which the reference entities are 
European high-yield (i.e., below investment grade or ``junk bond'') 
debt issuers. The Fund seeks to increase in value when the European 
high yield credit market improves (i.e., the likelihood of payment by 
European high yield debt issuers increases), while also seeking to 
limit the impact of a change in the credit quality of any single high 
yield debt issuer. To achieve its objective, the Fund will invest, 
under normal circumstances, at least 80% of its net assets in centrally 
cleared index-based CDS. The Adviser intends to utilize CDS to sell 
credit protection, thus obtaining exposure to European high yield 
credit. The Fund's investments in CDS will be consistent with the 
Fund's investment objective and will not be used to create leverage. 
The Fund will seek to obtain long credit exposure equivalent to its 
assets and will not provide leveraged exposure to credit.
    The Adviser will actively manage the Fund, selecting credit 
derivatives based on the following primary considerations: 
Diversification; liquidity; and sensitivity to changes in credit 
quality. The Adviser may, at times, also consider other factors such as 
the relative value of one credit derivative versus another. The Fund 
will typically have exposure to individual sectors to the same extent 
as the index-based instruments in which it invests.

ProShares CDS Short European HY Credit ETF

    The investment objective of the Fund is to provide inverse exposure 
to credit by investing primarily in a broadly diversified, liquid 
portfolio of index-based CDS for which the reference entities are 
European high yield (i.e., below investment grade or ``junk bond'') 
debt issuers. The Fund seeks to increase in value when the European 
high yield credit market declines (i.e., the likelihood of payment by 
European high yield debt issuers decreases), while also seeking to 
limit the impact of a change in the credit quality of any single high 
yield debt issuer. To achieve its objective, the Fund will invest, 
under normal circumstances, at least 80% of its net assets in centrally 
cleared index-based CDS. The Adviser intends to utilize CDS to buy 
credit protection, thus obtaining inverse exposure to European high 
yield credit. The Fund's investments in CDS will be consistent with the 
Fund's investment objective and will not be used to create leverage. 
The Fund will seek to obtain short credit exposure equivalent to its 
assets and will not provide leveraged exposure to credit.
    The Adviser will actively manage the Fund, selecting credit 
derivatives based on the following primary considerations: 
Diversification; liquidity; and sensitivity to changes in credit 
quality. The Adviser may, at times, also consider other factors such as 
the relative value of one credit derivative versus another. The Fund 
will typically have exposure to individual sectors to the same extent 
as the index-based instruments in which it invests.

ProShares CDS European IG Credit ETF

    The investment objective of the Fund is to provide long exposure to 
credit by investing primarily in a broadly diversified, liquid 
portfolio of index-based CDS for which the reference entities are 
European investment grade debt issuers. The Fund seeks to increase in 
value when the European investment grade credit market improves (i.e., 
the likelihood of payment by European investment grade debt issuers 
increases), while also seeking to limit the impact of a change in the 
credit quality of any single investment grade debt issuer. To achieve 
its objective, the Fund will invest, under normal circumstances, at 
least 80% of its net assets in centrally cleared index-based CDS. The 
Adviser intends to utilize CDS to sell credit protection, thus 
obtaining long exposure to European investment grade credit. The Fund's 
investments in CDS will be consistent with the Fund's investment 
objective and will not be used to create leverage. The Fund will seek 
to obtain long credit exposure equivalent to its assets and will not 
provide leveraged exposure to credit.
    The Adviser will actively manage the Fund, selecting credit 
derivatives based on the following primary considerations: 
Diversification; liquidity; and sensitivity to changes in credit 
quality. The Adviser may, at times, also consider other factors such as 
the relative value of one credit derivative versus another. The Fund 
will typically have exposure to individual sectors to the same extent 
as the index-based instruments in which it invests.

ProShares CDS Short European IG Credit ETF

    The investment objective of the Fund is to provide inverse exposure 
to credit by investing primarily in a broadly diversified, liquid 
portfolio of index-based CDS and for which the reference entities are 
European investment grade debt issuers. The Fund seeks to increase in 
value when the European investment grade credit market declines (i.e., 
the likelihood of payment by European investment grade debt issuers 
decreases), while also seeking to limit the impact of a change in the 
credit quality of any single investment grade debt issuer. To achieve 
its objective, the Fund will invest, under normal circumstances, at 
least 80% of its net assets in centrally cleared index-based CDS. The 
Adviser intends to utilize CDS to buy credit protection, thus obtaining 
inverse exposure to European investment grade credit. The Fund's 
investments in CDS will be consistent with the Fund's investment 
objective and will not be used to create leverage. The Fund will seek 
to obtain short credit exposure equivalent to its assets

[[Page 27026]]

and will not provide leveraged exposure to credit.
    The Adviser will actively manage the Fund, selecting credit 
derivatives based on the following primary considerations: 
Diversification; liquidity; and sensitivity to changes in credit 
quality. The Adviser may, at times, also consider other factors such as 
the relative value of one credit derivative versus another. The Fund 
will typically have exposure to individual sectors to the same extent 
as the index-based instruments in which it invests.

B. Other Portfolio Holdings

    In addition to the instruments described above, the Funds may also 
invest, to a more limited extent and in a manner consistent with its 
investment objective, in exchange-traded futures contracts linked to 
index-based CDS (also known as ``credit index futures''), which are 
also centrally cleared.\9\ Each Fund will also invest in money market 
instruments \10\ in a manner consistent with its investment objective 
in order to generate additional return, to help manage cash flows in 
and out of the Fund, such as in connection with payment of dividends or 
expenses, to satisfy margin requirements, and to provide collateral or 
to otherwise back investments in CDS and futures contracts.
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    \9\ As a general matter, futures contracts are standardized 
contracts traded on, or subject to the rules of, an exchange that 
call for the future delivery of a specified quantity and type of 
asset at a specified time and place or, alternatively, may call for 
cash settlement. Credit index futures provide exposure to the credit 
of a number of reference entities. Unlike CDS, certain credit index 
futures do not provide protection against events of default.
    \10\ For each of the Funds, the specific money market 
instruments are Treasury securities and repurchase agreements and, 
in the future, may include money market fund shares.
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C. The Funds' Investment Restrictions

    Each Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid assets (calculated at the time of investment) deemed 
illiquid by the Adviser \11\ under the Investment Company Act of 1940 
(``1940 Act''). Each 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 assets. Illiquid 
assets include assets subject to contractual or other restrictions on 
resale and other instruments that lack readily available markets as 
determined in accordance with Commission staff guidance.
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    \11\ In reaching liquidity decisions, the Adviser may consider 
the following factors: The frequency of trades and quotes for the 
security; the number of dealers wishing 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).
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    Each Fund intends to qualify each year as a regulated investment 
company (``RIC'') under Subchapter M of the Internal Revenue Code of 
1986, as amended. Each Fund will invest its assets, and otherwise 
conduct its operations, in a manner that is intended to satisfy the 
qualifying income, diversification, and distribution requirements 
necessary to establish and maintain RIC qualification under Subchapter 
M. Each Fund will not invest in options or non-U.S. equity securities.

III. Discussion and Commission Findings

    After careful review, the Commission finds that the Exchange's 
proposal to list and trade the Shares is consistent with the Exchange 
Act and the rules and regulations thereunder applicable to a national 
securities exchange.\12\ In particular, the Commission finds that the 
proposed rule change is consistent with Section 6(b)(5) of the Exchange 
Act,\13\ which requires, among other things, that the Exchange's rules 
be designed to promote just and equitable principles of trade, to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general, to protect 
investors and the public interest. The Commission notes that the Funds 
and the Shares must comply with the requirements of BATS Rule 14.11(i) 
for the Shares to be listed and traded on the Exchange.
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    \12\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \13\ 15 U.S.C. 78f(b)(5).
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    The Commission finds that the proposal to list and trade the Shares 
on the Exchange is consistent with Section 11A(a)(1)(C)(iii) of the 
Exchange Act,\14\ which sets forth Congress' finding that it is in the 
public interest and appropriate for the protection of investors and the 
maintenance of fair and orderly markets to assure the availability to 
brokers, dealers, and investors of information with respect to 
quotations for and transactions in securities. Quotation and last-sale 
information for the Shares will be available on the facilities of the 
Consolidated Tape Association (``CTA''). On each business day, before 
commencement of trading in Shares during the Regular Trading Hours\15\ 
on the Exchange, the Funds will disclose on their Web sites the 
Disclosed Portfolio that will form the basis for the Funds' calculation 
of NAV at the end of the business day.\16\ The NAV of the Shares of the 
CDS North American HY Credit ETF, the CDS Short North American HY 
Credit ETF, the CDS North American IG Credit ETF, and the CDS Short 
North American IG Credit ETF will generally be determined at 3:00 p.m. 
Eastern Time each business day when the BATS Exchange is open for 
trading. The NAV of the CDS European HY Credit ETF, the CDS Short 
European HY Credit ETF, the CDS European IG Credit ETF, and the CDS 
Short European IG Credit ETF will generally be determined at 11:00 a.m. 
Eastern Time (or such time as equals 4:00 p.m. London Time) on each 
business day that the BATS Exchange is open.\17\ In addition, for the 
Funds, an estimated value, defined in BATS Rule 14.11(i)(3)(C) as the 
``Intraday Indicative Value,'' that reflects an estimated intraday 
value of the individual Fund's

[[Page 27027]]

portfolio, will be disseminated. The Intraday Indicative Value will be 
based upon the current value for the components of the Disclosed 
Portfolio and will be updated and widely disseminated by one or more 
major market data vendors at least every 15 seconds during the 
Exchange's Regular Trading Hours.\18\ According to the Exchange, 
intraday price quotations on CDS of the type held by the Funds, as well 
as repurchase agreements and Treasury instruments, are available from 
major broker-dealer firms and from third-parties, which may provide 
prices free with a time delay, or ``live'' with a paid fee. For futures 
contracts, such intraday information is available directly from the 
applicable listing exchange. Intraday price information is also 
available through subscription services, such as Bloomberg and Thomson 
Reuters, which can be accessed by authorized participants and other 
investors. Money market fund shares are not generally priced or quoted 
on an intraday basis. 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 for the Shares will be available daily in 
the print and online financial press. In addition, the Funds' Web sites 
will include a form of the prospectus for the Funds, as well as 
information relating to NAV and other quantitative information.
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    \14\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \15\ Regular Trading Hours are 9:30 a.m. to 4:00 p.m. Eastern 
Time.
    \16\ The Disclosed Portfolio will include, as applicable, the 
names (including the credit derivative series or contract), 
quantity, exposure value (notional value + gains/losses), and market 
value of CDS, futures, and other assets held by the Funds and the 
characteristics of such assets. The Web sites and information will 
be publicly available at no charge. 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.
    \17\ Securities and other assets will generally be valued at 
their market price using information provided by a pricing service 
or market quotations. Certain short-term securities will be valued 
on the basis of amortized cost. CDS will generally be valued on the 
basis of market prices, generally the mid-point between the bid/ask 
quotes, obtained from a third-party pricing service as of the time a 
Fund calculates its NAV. Futures contracts, such as the credit index 
futures, will generally be valued at their last sale price prior to 
the time at which the NAV per Share of a class of Shares of a Fund 
is determined. Of the money market instruments held by the Funds, 
repurchase agreements will generally be valued at cost. U.S. 
government securities will generally be priced at a quoted market 
price from an active market, generally the mid-point between the 
bid/ask quotes. For U.S. government securities that mature within 
sixty days, amortized cost may be used to approximate fair value. 
Money market funds will generally be valued at their current NAV per 
share, typically $1.00 per share. Alternatively, fair valuation 
procedures may be applied if deemed more appropriate. Routine 
valuation of certain other derivatives is performed using procedures 
approved by the Board of Trustees.
    \18\ The Exchange represents that several major market data 
vendors display or make widely available Intraday Indicative Values 
published via the CTA or other data feeds.
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    The Commission also believes that the proposal to list and trade 
the Shares is reasonably designed to promote fair disclosure of 
information that may be necessary to price the Shares appropriately and 
to prevent trading when a reasonable degree of transparency cannot be 
assured. 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. The Exchange will halt trading in the 
Shares under the conditions specified in BATS Rule 11.18. In addition, 
trading may be halted because of market conditions or for reasons that, 
in the view of the Exchange, make trading in the Shares inadvisable. 
These may include: (1) The extent to which trading is not occurring in 
the CDS, futures, and/or the financial instruments composing the 
Disclosed Portfolio of the Funds; or (2) whether other unusual 
conditions or circumstances detrimental to the maintenance of a fair 
and orderly market are present.\19\ Trading in the Shares also will be 
subject to Rule 14.11(i)(4)(B)(iv), which sets forth specific 
circumstances under which Shares of the Funds may be halted. The 
Exchange prohibits the distribution of material non-public information 
by its employees. The Commission notes that, as represented by the 
Exchange, the Adviser is not a registered broker-dealer, but is 
currently affiliated with a broker-dealer, and that Adviser personnel 
who make decisions regarding the Funds' portfolios are subject to 
procedures designed to prevent the use and dissemination of material, 
non-public information regarding the Funds' portfolios.\20\ In 
addition, the Commission notes that, consistent with BATS Rule 
14.11(i)(4)(B)(ii)(b), the Reporting Authority, as defined in BATS Rule 
14.11(i)(3)(D), must implement and maintain, or be subject to, 
procedures designed to prevent the use and dissemination of material, 
non-public information regarding the actual components of each Fund's 
portfolio. The Exchange may obtain information regarding trading in the 
Shares and the underlying futures via the Intermarket Surveillance 
Group (``ISG'') from other exchanges who are members or affiliates of 
the ISG or with which the Exchange has entered into a comprehensive 
surveillance sharing agreement.\21\ In addition, the Exchange is able 
to access, as needed, trade information for certain fixed income 
instruments reported to FINRA's Trade Reporting and Compliance Engine.
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    \19\ See BATS Rule 14.11(i)(4)(B)(iii) (setting forth certain 
circumstances under which the Exchange will consider the suspension 
of trading in or removal from listing of a series of Managed Fund 
Shares).
    \20\ See supra note 5 and accompanying text. The Commission 
notes that an investment adviser to an open-end fund is required to 
be registered under the Investment Advisers Act of 1940 (``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.
    \21\ For a list of the current members and affiliate members of 
ISG, see www.isgportal.com. The Exchange has noted 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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    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. In support of this 
proposal, the Exchange has made representations, including:
    (1) The Exchange has appropriate rules to facilitate transactions 
in the Shares during all trading sessions.\22\
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    \22\ See supra note 15. The Pre-Opening Session is from 8:00 
a.m. to 9:30 a.m. Eastern Time. The After Hours Trading Session is 
from 4:00 p.m. to 5:00 p.m. Eastern Time.
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    (2) The Shares will be subject to BATS Rule 14.11(i), which sets 
forth the initial and continued listing criteria applicable to Managed 
Fund Shares.
    (3) Trading of the Shares through the Exchange will be subject to 
the Exchange's surveillance procedures for derivative products, 
including Managed Fund Shares, and that these procedures are adequate 
to properly monitor Exchange trading of the Shares during all trading 
sessions and to deter and detect violations of Exchange rules and the 
applicable federal securities laws. In addition, all of the futures 
contracts in the Disclosed Portfolio for the Funds will trade on 
markets that are members of ISG or with which the Exchange has in place 
a comprehensive surveillance sharing agreement.
    (4) Prior to the commencement of trading, the Exchange will inform 
its members in an Information Circular of the special characteristics 
and risks associated with trading the Shares. Specifically, the 
Information Circular will discuss the following: (1) The procedures for 
purchases and redemptions of Shares in Creation Units (and that Shares 
are not individually redeemable); (2) BATS Rule 3.7, which imposes 
suitability obligations on Exchange members with respect to 
recommending transactions in the Shares to customers; (3) how 
information regarding the Intraday Indicative Value is disseminated; 
(4) the risks involved in trading the Shares during the Pre-Opening and 
After Hours Trading Sessions when an updated Intraday Indicative Value 
will not be calculated or publicly disseminated; (5) the requirement 
that members deliver a

[[Page 27028]]

prospectus to investors purchasing newly issued Shares prior to or 
concurrently with the confirmation of a transaction; and (6) trading 
information.
    (5) For initial and/or continued listing, the Funds must be in 
compliance with Rule 10A-3 under the Act.\23\
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    \23\ See 17 CFR 240.10A-3.
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    (6) Each Fund's investments in CDS will be consistent with its 
respective investment objective and will not be used to create 
leverage. The Funds will seek to obtain only non-leveraged long or 
short credit exposure, as applicable (i.e., exposure equivalent to Fund 
assets). To limit counterparty risk, the Funds will utilize centrally 
cleared CDS contracts.
    (7) Each Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid assets.
    (8) A minimum of 100,000 Shares for each Fund will be outstanding 
at the commencement of trading on the Exchange.

This approval order is based on all of the Exchange's representations, 
including those set forth above and in the Notice, and the Exchange's 
description of the Funds.
    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act \24\ and the 
rules and regulations thereunder applicable to a national securities 
exchange.
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    \24\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\25\ that the proposed rule change (SR-BATS-2014-007), be, and it 
hereby is, approved.
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    \25\ 15 U.S.C. 78s(b)(2).
    \26\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-10772 Filed 5-9-14; 8:45 am]
BILLING CODE 8011-01-P


