
[Federal Register Volume 79, Number 146 (Wednesday, July 30, 2014)]
[Notices]
[Pages 44224-44229]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-17880]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72666; File No. SR-NYSEArca-2013-122]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting 
Approval of Proposed Rule Change as Modified by Amendment No. 2 Thereto 
Relating to the Use of Derivative Instruments by PIMCO Total Return 
Exchange Traded Fund

July 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'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend the description of the means of achieving 
the investment objective applicable to the PIMCO Total Return Exchange 
Traded Fund (``Fund'') relating to its use of derivative instruments. 
The proposed rule change was published for comment in the Federal 
Register on November 26, 2013.\3\ On January 9, 2014, the Commission 
designated a longer period within which to approve the proposed rule 
change, disapprove the proposed rule change, or institute proceedings 
to determine whether to disapprove the proposed rule change.\4\ On 
February 24, 2014, the Commission instituted proceedings to determine 
whether to approve or disapprove the proposed rule change.\5\ On April 
15, 2014, the Exchange submitted Amendments No. 1 and 2 to the proposed 
rule change.\6\ On May 21, 2014, pursuant to Section 19(b)(2) of the 
Act,\7\ the Commission designated a longer period within which to issue 
an order approving or disapproving the proposed rule change.\8\ The 
Commission received no comments

[[Page 44225]]

on the proposal. This order grants approval of 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\ See 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.
    \5\ See Securities Exchange Act Release No. 71606, 79 FR 11486 
(February 28, 2014).
    \6\ The Exchange submitted and subsequently withdrew Amendment 
No. 1 to the proposed rule change. In Amendment No. 2, the Exchange 
provided additional details describing how the contents of the 
portfolio composition of the Fund would be disclosed on a daily 
basis. Specifically, the Fund will disclose on the Fund's Web site 
the following information regarding each portfolio holding, as 
applicable to the type of holding: ticker symbol, CUSIP number or 
other identifier, if any; a description of the holding (including 
the type of holding, such as the type of swap); the identity of the 
security, commodity, index or other asset or instrument underlying 
the holding, if any; for options, the option strike price; quantity 
held (as measured by, for example, par value, notional value or 
number of shares, contracts or units); maturity date, if any; coupon 
rate, if any; effective date, if any; market value of the holding; 
and the percentage weighting of the holding in the Fund's portfolio. 
It also confirms that all other facts and representations made in 
the Prior Release remain unchanged. See infra, note 9. Amendment No. 
2 provides clarification to the proposed rule change, and because it 
does not materially affect the substance of the proposed rule 
change, Amendment No. 2 does not require notice and comment.
    \7\ 15 U.S.C. 78s(b)(1).
    \8\ See Securities Exchange Act Release No. 72216, 79 FR 30680 
(May 28, 2014).
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change

    The Commission previously approved the listing and trading of 
shares (``Shares'') of the Fund under NYSE Arca Equities Rule 8.600, 
which governs the listing and trading of Managed Fund Shares on the 
Exchange.\9\ 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.\10\ The investment manager to the Fund is Pacific Investment 
Management Company LLC (``PIMCO'' or ``Adviser'').
---------------------------------------------------------------------------

    \9\ 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'').
    \10\ The Exchange represents that the Trust is registered under 
the Investment Company Act of 1940 (``1940 Act''). 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 and under the 1940 Act relating to the Fund 
(File Nos. 333-155395 and 811-22250) (``Registration Statement''). 
The Exchange further represents that the Trust has obtained certain 
exemptive relief under the 1940 Act. See Investment Company Act 
Release No. 28993 (November 10, 2009) (File No. 812-13571) 
(``Exemptive Order'').
---------------------------------------------------------------------------

    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.\11\ In view of the 
No-Action Letter issued by staff in the Commission's Division of 
Investment Management on December 6, 2012, the Exchange proposes to 
change this representation to permit the Fund to use derivative 
instruments, as described below, and makes the following 
representations and statements.\12\
---------------------------------------------------------------------------

    \11\ On December 6, 2012, the staff of the Commission's Division 
of Investment Management (``IM'') issued a no-action letter (``No-
Action Letter'') relating to the use of derivatives by actively-
managed exchange traded funds (``ETFs''). See No-Action Letter dated 
December 6, 2012 from Elizabeth G. Osterman, Associate Director, 
Office of Exemptive Applications, IM. The No-Action Letter stated 
that IM staff would 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 IM 
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) 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.
    \12\ 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. See 
id.
---------------------------------------------------------------------------

    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.\13\ 
``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.\14\ 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'').
---------------------------------------------------------------------------

    \13\ 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.
    \14\ 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., 2Xs and 3Xs) of the Fund's broad-based securities market index.

The Fund's Use of Derivatives

    The Exchange states that, 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 values depend 
upon, or are derived from, the values 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 Fund may, but is not required to, use derivative 
instruments for risk management purposes or as part of its investment 
strategies.\15\
---------------------------------------------------------------------------

    \15\ The Exchange represents that 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.
---------------------------------------------------------------------------

    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. As described further 
below, the Fund will typically use derivative instruments as a 
substitute for taking a position in the underlying asset 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. 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 Fund will

[[Page 44226]]

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.\16\ 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.
---------------------------------------------------------------------------

    \16\ 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 Exchange states that the Adviser believes 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 Exchange states 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.
    The Exchange states that 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 Exchange states that the Adviser believes that the use of 
derivatives will allow the Fund to selectively add diversifying sources 
of return from selling options. Options 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. Options 
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 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, 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.
    The Exchange states that this proposal would become 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 
Exchange further states that the Adviser has managed and will continue 
to manage the Fund in the manner described in the Prior Release, and 
will not implement the proposed changes until this proposed rule change 
has become operative. In addition, the Exchange 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, the Exchange represents that all other facts presented and 
representations made in the Prior Release remain unchanged.

Derivatives Valuation Methodology for Purposes of Determining Net Asset 
Value

    According to the Exchange, 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

[[Page 44227]]

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.
    The Exchange states that 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. On a 
daily basis, the Fund will disclose on the Fund's Web site the 
following information regarding each portfolio holding, as applicable 
to the type of holding: Ticker symbol, CUSIP number or other 
identifier, if any; a description of the holding (including the type of 
holding, such as the type of swap); the identity of the security, 
commodity, index or other asset or instrument underlying the holding, 
if any; for options, the option strike price; quantity held (as 
measured by, for example, par value, notional value or number of 
shares, contracts or units); maturity date, if any; coupon rate, if 
any; effective date, if any; market value of the holding; and the 
percentage weighting of the holding in the Fund's portfolio.

Impact on Arbitrage Mechanism

    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. Market makers and participants should be able to 
value derivatives as long as the positions are disclosed with relevant 
information. The Exchange states that the Adviser believes that the 
price at which Shares trade will continue to be 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 Exchange states that, according to the Adviser, there will not 
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,

[[Page 44228]]

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 (``TRACE''). The Exchange also 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, NAV calculation, 
creation and redemption procedures, fees, portfolio holdings, 
disclosure policies, distributions and taxes is included in the Prior 
Release, Notice, and the Registration Statement, as applicable.\19\
---------------------------------------------------------------------------

    \19\ See supra notes 9, 3, and 10.
---------------------------------------------------------------------------

III. Discussion and Commission's Findings

    The Commission has carefully reviewed the proposed rule change and 
finds that it is consistent with the requirements of Section 6 of the 
Act \20\ and the rules and regulations thereunder applicable to a 
national securities exchange.\21\ In particular, the Commission finds 
that the proposal is consistent with Section 6(b)(5) of the Act,\22\ 
which requires, among other things, that the Exchange's rules be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in facilitating transactions in 
securities, to remove impediments to, and perfect the mechanism of, a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest. The Commission notes that 
the Fund and the Shares must comply with the requirements of NYSE Arca 
Equities Rule 8.600 to continue to be listed and traded on the 
Exchange.
---------------------------------------------------------------------------

    \20\ 15 U.S.C. 78f.
    \21\ 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).
    \22\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission notes that, with respect to its proposed investments 
in derivatives, the Fund will seek, where possible, to use 
counterparties whose financial status is such that the risk of default 
is reduced. The Exchange states that PIMCO's Counterparty Risk 
Committee will evaluate the creditworthiness of counterparties on an 
ongoing basis. In addition to information provided by credit agencies, 
PIMCO credit analysts will 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.
    In addition, according to the Exchange, the proposed investments in 
derivative instruments will be made in accordance with the 1940 Act and 
consistent with the Fund's investment objective and policies. To 
further 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 the proposed derivative instruments. The 
Exchange represents that these procedures have been adopted consistent 
with Section 18 of the 1940 Act and related Commission guidance. In 
addition, with respect to the proposed investments in derivative 
instruments, the Exchange states that appropriate risk disclosures will 
be provided in the Fund's offering documents, including leveraging 
risk. The Exchange further represents that the Fund's investments, 
including the proposed investments in derivative instruments, are 
subject to all of the restrictions under the 1940 Act, including 
restrictions with respect to illiquid securities.
    Further, the Commission notes 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 include, as applicable to the type of 
holding: Ticker symbol, CUSIP number or other identifier, if any; a 
description of the holding (including the type of holding, such as the 
type of swap); the identity of the security, commodity, index or other 
asset or instrument underlying the holding, if any; for options, the 
option strike price; quantity held (as measured by, for example, par 
value, notional value or number of shares, contracts or units); 
maturity date, if any; coupon rate, if any; effective date, if any; 
market value of the holding; and the percentage weighting of the 
holding in the Fund's portfolio.
    The Exchange states that 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 Exchange 
notes that the price at which Shares trade will continue to be 
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. In addition, the Exchange notes that there will 
not be any significant impacts to the settlement or operational aspects 
of the Fund's arbitrage mechanism due to the use of derivatives.
    In support of this proposal, the Exchange has made additional 
representations, including:
    (1) The Adviser has managed and will continue to manage the Fund in 
the manner described in the Prior Release.
    (2) There is no change to the Fund's investment objective.
    (3) The Fund will continue to comply with all initial and continued 
listing requirements under NYSE Arca Equities Rule 8.600.
    (4) 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 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

[[Page 44229]]

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. 
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 TRACE.
    (5) The Fund will comply with the representations as prescribed in 
the No-Action Letter.
    (6) Except for the proposed changes, all other facts presented and 
representations made in the Prior Release remain unchanged.
    This approval order is based on the Exchange's representations and 
description of the Fund, including those set forth above and in the 
Notice. For the foregoing reasons, the Commission finds that the 
proposed rule change, as modified by Amendment No. 2, is consistent 
with Section 6(b)(5) of the Act \23\ and the rules and regulations 
thereunder applicable to a national securities exchange.
---------------------------------------------------------------------------

    \23\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\24\ that the proposed rule change (SR-NYSEArca-2013-122) as 
modified by Amendment No. 2 thereto be, and it hereby is, approved.
---------------------------------------------------------------------------

    \24\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
Kevin M. O'Neill,
Deputy Secretary.
---------------------------------------------------------------------------

    \25\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

[FR Doc. 2014-17880 Filed 7-29-14; 8:45 am]
BILLING CODE 8011-01-P


