
[Federal Register Volume 82, Number 20 (Wednesday, February 1, 2017)]
[Notices]
[Pages 8963-8966]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-02089]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79885; File No. SR-NYSEArca-2016-100]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Approving a 
Proposed Rule Change, as Modified by Amendments No. 1, No. 2, and No. 
3, To List and Trade Shares of the Direxion Daily Municipal Bond 
Taxable Bear 1X Fund Under NYSE Arca Equities Rule 5.2(j)(3)

January 26, 2017.

I. Introduction

    On July 13, 2016, NYSE Arca, Inc. (``Exchange'' or ``NYSE Arca'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to list and trade shares (``Shares'') of the 
Direxion Daily Municipal Bond Taxable Bear 1X Fund (``Fund''), a series 
of the Direxion Shares ETF Trust (``Trust''). The proposed rule change 
was published for comment in the Federal Register on August 3, 2016.\3\ 
On September 14, 2016, pursuant to Section 19(b)(2) of the Act,\4\ 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.\5\ On September 15, 2016, the Exchange filed Amendment No. 1 to 
the proposed rule change, which replaced the original filing in its 
entirety.\6\ On November 1, 2016, the Commission instituted proceedings 
under Section 19(b)(2)(B) of the Act \7\ to determine whether to 
approve or disapprove the proposed rule change.\8\ On November 23, 
2016, the Exchange filed Amendment No. 2 to the proposed rule 
change.\9\ On January 24, 2017, the Exchange filed Amendment No. 3 to 
the proposed rule change.\10\ The Commission received no comments on 
the proposed rule change. This order approves the proposed rule change, 
as modified by Amendments No. 1, No. 2, and No. 3.
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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. 78433 (July 28, 
2016), 81 FR 51241.
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 78840, 81 FR 64552 
(September 20, 2016). The Commission designated November 1, 2016, as 
the date by which the Commission shall either approve or disapprove, 
or institute proceedings to determine whether to disapprove, the 
proposed rule change.
    \6\ In Amendment No. 1, the Exchange: (1) Revised the 
description of the Fund's principal investments and (2) made other 
technical amendments. Amendment No. 1 is available at https://www.sec.gov/comments/sr-nysearca-2016-100/nysearca2016100-1.pdf. 
Because Amendment No. 1 does not materially alter the substance of 
the proposed rule change or raise unique or novel regulatory issues, 
Amendment No. 1 is not subject to notice and comment.
    \7\ 15 U.S.C. 78s(b)(2)(B).
    \8\ See Securities Exchange Act Release No. 79211 (November 7, 
2016), 81 FR 78231.
    \9\ In Amendment No. 2, the Exchange clarified how securities 
would be valued and made certain technical amendments. Amendment No. 
2 is available at https://www.sec.gov/comments/sr-nysearca-2016-100/nysearca2016100-2.pdf. Because Amendment No. 2 does not materially 
alter the substance of the proposed rule change or raise unique or 
novel regulatory issues, Amendment No. 2 is not subject to notice 
and comment.
    \10\ In Amendment No. 3, the Exchange corrected the name of the 
municipal bond index from which the Index constituents are derived, 
and clarified that individual issuers that represent at least 5% of 
the weight of the Index cannot account for more than 50% of the 
weight of the Index in the aggregate. Amendment No. 3 is available 
at https://www.sec.gov/comments/sr-nysearca-2016-100/nysearca2016100-1528182-131062.pdf. Because Amendment No. 3 does not 
materially alter the substance of the proposed rule change or raise 
unique or novel regulatory issues, Amendment No. 3 is not subject to 
notice and comment.
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II. The Exchange's Description of the Proposal 11
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    \11\ Additional information regarding the Trust, the Fund, the 
underlying index, and the Shares, including investment strategies, 
risks, creation and redemption procedures, fees, portfolio holdings, 
disclosure policies, calculation of the NAV, distributions, and 
taxes, among other things, can be found in Amendment No. 1, supra 
note 6, Amendment No. 2, supra note 9, Amendment No. 3, supra note 
10, and the Registration Statement, infra note 13.
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    The Exchange proposes to list and trade the Shares under NYSE Arca

[[Page 8964]]

Equities Rule 5.2(j)(3), Commentary .02, which governs the listing and 
trading of Investment Company Units based on fixed income securities 
indexes. The Exchange submitted the proposed rule change because the 
index underlying the Fund does not satisfy the requirement set forth in 
Commentary .02(a)(2) of NYSE Arca Equities Rule 5.2(j)(3) applicable to 
the generic listing of Investment Company Units based on fixed income 
securities indexes.\12\
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    \12\ Specifically, as of May 23, 2016, only 32.75% of the weight 
of the index components had a minimum original principal amount 
outstanding of $100 million or more, and Commentary .02(a)(2) 
requires that at least 75% of the weight of an index's components 
have a minimum original principal amount outstanding of $100 million 
or more. The Exchange states that the underlying index satisfies all 
of the other requirements for generic listing. See Amendment No. 1, 
supra note 6, at 9.
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    The Fund is a series of the Trust.\13\ Rafferty Asset Management, 
LLC would be the investment adviser to the Fund. Foreside Fund 
Services, LLC would be the distributor of the Fund's Shares. The Bank 
of New York Mellon would serve as the accounting agent, custodian, and 
transfer agent for the Fund. U.S. Bancorp Fund Services, LLC would 
serve as the Fund's administrator.
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    \13\ The Trust is registered under the Investment Company Act of 
1940 (``1940 Act''). According to the Exchange, on February 29, 
2016, the Trust filed a registration statement on Form N-1A under 
the Securities Act of 1933 and the 1940 Act (File Nos. 811-22201 and 
333-150525) (``Registration Statement'').
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A. The Underlying Index

    The Standard & Poor's National AMT-Free Municipal Bond Index 
(``Index'') would be the Fund's benchmark.\14\ The Index is a broad, 
comprehensive, market value-weighted index designed to measure the 
performance of the tax-exempt, investment-grade U.S. municipal bond 
market. Index constituents are derived from the S&P Municipal Bond 
Index. To be classified as an eligible bond for inclusion in the Index, 
a bond must meet all of the following criteria on the rebalancing date: 
The bond issuer is a state, local government, or agency such that 
interest on the bond is exempt from federal income tax; a bond must 
have a rating of at least BBB-by Standard & Poor's, Baa3 by Moody's, or 
BBB by Fitch; the bond must be denominated in U.S. Dollars (``USD''); 
each bond must be a constituent of a deal where the deal's original 
offering amount was at least $100 million USD; as of the next 
rebalancing date, the bond must have a minimum term to maturity and/or 
call date greater than or equal to one calendar month plus one calendar 
day; and the bond must have a minimum par amount of $25 million USD. At 
each monthly rebalancing, no one issuer can represent more than 25% of 
the weight of the Index, and individual issuers that represent at least 
5% weight of the Index cannot account for more than 50% of the weight 
of the Index in the aggregate. Generally, the Index is reviewed and 
rebalanced on a monthly basis. The following bond types are 
specifically excluded from the Index: Bonds subject to the alternative 
minimum tax; commercial paper; derivative securities (inverse floaters, 
forwards, swaps); housing bonds; insured conduit bonds where the 
obligor is a for-profit institution; non-insured conduit bonds; non-
rated bonds; notes; taxable municipals; tobacco bonds; and variable 
rate debt.
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    \14\ S&P Dow Jones Indices is the ``Index Provider'' with 
respect to the Index. The Index Provider is not a broker-dealer or 
affiliated with a broker-dealer and has implemented procedures 
designed to prevent the use and dissemination of material, non-
public information regarding the Index.
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B. The Fund's Principal Investments

    The Fund would seek to track 100% of the inverse of the daily 
performance of the Index.\15\ Under normal circumstances, the Fund 
would create net short positions by investing at least 80% of the 
Fund's assets (plus any borrowings for investment purposes) in the 
following financial instruments (``Financial Instruments''): Options on 
exchange-traded funds (``ETFs'') \16\ and indices, traded on U.S. 
exchanges (based on aggregate gross notional value); swaps that provide 
short exposure to the securities included in the Index and various ETFs 
(based on aggregate gross notional value); and short positions in ETFs, 
as described below in this section, that, in combination, provide 
inverse exposure to the Index.
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    \15\ The Fund would not seek income that is exempt from federal, 
state, or local income taxes.
    \16\ For purposes of this filing, ETFs are Investment Company 
Units (as described in NYSE Arca Equities Rule 5.2(j)(3)); Portfolio 
Depositary Receipts (as described in NYSE Arca Equities Rule 8.100); 
and Managed Fund Shares (as described in NYSE Arca Equities Rule 
8.600) and also are securities listed on another national securities 
exchange pursuant to substantially equivalent listing rules. The 
Fund will not take short positions in inverse, leveraged, or inverse 
leveraged ETFs.
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    The Fund might invest in options that provide short exposure to the 
Index or various ETFs, including iShares National Muni Bond ETF, SPDR 
Nuveen Barclays Municipal Bond ETF, iShares Short-term National Muni 
Bond ETF, SPDR Nuveen Barclays Short-Term Municipal Bond ETF, Market 
Vectors High-Yield Municipal Index ETF, SPDR Nuveen S&P High Yield 
Municipal Bond ETF, Market Vectors AMT-Free Intermediate Municipal 
Index ETF, PowerShares National AMT-Free Municipal Bond Portfolio, 
Vanguard Tax-Exempt Bond ETF, and the PIMCO Intermediate Municipal Bond 
Active Exchange-Traded Fund (such ETFs, collectively, ``Named ETFs''). 
The Fund might also invest in swaps that provide short exposure to the 
securities included in the Index and various ETFs, including the Named 
ETFs. Finally, the Fund might take direct short positions in ETFs, such 
as the Named ETFs. The Fund would not take long positions in ETFs or 
invest in options that overlie inverse, leveraged, or inverse leveraged 
ETFs.

C. The Fund's Non-Principal Investments

    According to the Exchange, under normal circumstances, at least 80% 
of the Fund's assets will be invested in Financial Instruments to 
establish net short positions, as described above, and the Fund's 
remaining assets might be invested in cash and the following cash 
equivalents (in addition to cash or cash equivalents used to 
collateralize the Fund's investments in Financial Instruments): Money 
market funds, depository accounts with institutions with high quality 
credit ratings, U.S. government securities that have terms-to-maturity 
of less than 397 days, and repurchase agreements that have terms-to-
maturity of less than 397 days.

III. Discussion and Commission Findings

    After careful review, the Commission finds that the Exchange's 
proposal to list and trade the Shares, as modified by Amendments No. 1, 
No. 2, and No. 3, is consistent with the Exchange Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\17\ In particular, 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,\18\ which sets forth Congress's 
finding that it is in the public interest and appropriate for the 
protection of investors and the maintenance of fair and orderly markets 
to assure the availability to brokers, dealers, and investors of 
information with respect to quotations for, and transactions in, 
securities. According to the Exchange, quotation and last-sale 
information for the Shares will be available via the Consolidated Tape 
Association (``CTA'')

[[Page 8965]]

high-speed line, and information regarding the previous day's closing 
price for the Shares may be found in the financial section of certain 
major U.S. newspapers. 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.
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    \17\ 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).
    \18\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
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    The Commission also finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Exchange Act,\19\ 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 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 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. The Intraday Indicative 
Value (``IIV'') for the Shares, calculated by a third party market data 
provider, will be widely disseminated at least every 15 seconds during 
the Core Trading Session \20\ by one or more major market data 
vendors.\21\ The IIV calculation will include all of the Fund's assets. 
Additionally, the portfolio of instruments held by the Fund will be 
disclosed daily on the Fund's Web site. The Fund's Web site will also 
include the prospectus for the Fund and additional data relating to the 
NAV, as well as applicable quantitative information. Quotation and 
last-sale information for U.S. exchange-listed securities will be 
available from the exchange on which they are listed. Quotation and 
last-sale information for exchange-listed options cleared via the 
Options Clearing Corporation will be available via the Options Price 
Reporting Authority. A source of price information for municipal 
securities underlying the derivatives held by the Fund is the 
Electronic Municipal Market Access, which is administered by the 
Municipal Securities Rulemaking Board. Price information for cash 
equivalents and swaps may be obtained from brokers and dealers who make 
markets in such securities or through nationally recognized pricing 
services through subscription agreements.
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    \19\ 15 U.S.C. 78f(b)(5).
    \20\ Ordinarily the Exchange's Core Trading Session is between 
9:30 a.m. and 4:00 p.m. EST.
    \21\ According to the Exchange, several major market data 
vendors display or make widely available IIVs taken from CTA or 
other data feeds.
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    The Commission also believes that the proposal is designed to 
prevent trading when a reasonable degree of transparency cannot be 
assured. The Exchange states that: (1) If the IIV or the Index values 
are not being disseminated as required, it may halt trading during the 
day in which the interruption to the dissemination of the applicable 
IIV or Index value occurs; and (2) if the interruption to the 
dissemination of the applicable IIV or Index value persists past the 
trading day in which it occurred, the Exchange will halt trading in the 
Shares.\22\ The Exchange will obtain a representation from the issuer 
of the Shares that the NAV per Share will be calculated daily and made 
available to all market participants at the same time.\23\ Under NYSE 
Arca Equities Rule 7.34(a)(5), if the Exchange becomes aware that the 
NAV is not being disseminated to all market participants at the same 
time, it will halt trading in the Shares until that time as the NAV is 
available to all market participants.
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    \22\ See Amendment No. 1, supra note 6, at 15-16.
    \23\ See id. at 16.
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    To support this proposal, the Exchange has made the following 
representations:
    (1) The Exchange deems the Shares to be equity securities, and 
therefore trading in the Shares will be subject to the Exchange's 
existing rules governing the trading of equity securities.\24\
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    \24\ See id.
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    (2) The Exchange has appropriate rules to facilitate transactions 
in the Shares during all trading sessions.\25\
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    \25\ See id.
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    (3) Trading in the Shares will be subject to the existing trading 
surveillances administered by the Exchange, as well as cross-market 
surveillances administered by the Financial Industry Regulatory 
Authority (``FINRA'') on behalf of the Exchange, which 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.\26\
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    \26\ See id. The Exchange states that FINRA conducts cross-
market surveillances on behalf of the Exchange pursuant to a 
regulatory services agreement, and that the Exchange is responsible 
for FINRA's performance under this regulatory services agreement. 
See id. at n.20.
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    (4) The Index and the Shares will conform to the initial and 
continued listing criteria under NYSE Arca Equities Rules 5.2(j)(3) and 
5.5(g)(2), except that the Index will not meet the requirement of 
Commentary .02(a)(2) to NYSE Arca Equities Rule 5.2(j)(3), as described 
above.\27\
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    \27\ See supra note 12.
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    (5) The Exchange, or FINRA on behalf of the Exchange, or both, will 
communicate as needed regarding trading in the Shares, ETFs, and 
options with other markets and other entities that are members of the 
Intermarket Surveillance Group (``ISG''), and the Exchange, or FINRA, 
on behalf of the Exchange, or both, may obtain trading information 
regarding trading in such securities from such markets and other 
entities.\28\ In addition, the Exchange may obtain information 
regarding trading in such securities from markets and other entities 
that are members of ISG or with which the Exchange has in place a 
comprehensive surveillance sharing agreement.\29\
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    \28\ See Amendment No. 1, supra note 6, at 17.
    \29\ See id.
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    (6) Not more than 10% of the net assets of the Fund in the 
aggregate invested in exchange-traded options shall consist of options 
whose principal market is not a member of ISG or is a market with which 
the Exchange does not have a comprehensive surveillance sharing 
agreement.
    (7) The Fund will not take short positions in inverse, leveraged, 
or inverse leveraged ETFs, or invest in options that overlie inverse, 
leveraged, or inverse leveraged ETFs.
    (8) The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid assets. 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 assets.
    (9) For initial and continued listing, the Fund must be in 
compliance with Rule 10A-3 under the Exchange Act.\30\
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    \30\ See id. at 16.
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    (10) A minimum of 100,000 Shares will be outstanding at the 
commencement of trading on the Exchange.
    (11) The Index Provider is not a broker-dealer or affiliated with a 
broker-dealer and has implemented procedures designed to prevent the 
use and dissemination of material, non-public information regarding the 
Index.\31\
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    \31\ See Amendment No. 1, supra note 6, at 6-7, n.8.
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    (12) The Exchange has a general policy prohibiting the distribution 
of

[[Page 8966]]

material, non-public information by its employees.\32\
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    \32\ See id. at 15.
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    (13) Prior to the commencement of trading, the Exchange will inform 
its Equity Trading Permit Holders (``ETP Holders'') in an Information 
Bulletin (``Bulletin'') of the special characteristics and risks 
associated with trading the Shares of the Fund. Specifically, the 
Bulletin will discuss the following: (a) The procedures for purchases 
and redemptions of Shares in Creation Units (as defined in Amendment 
No. 1) (and that Shares are not individually redeemable); (b) NYSE Arca 
Equities Rule 9.2(a), which imposes a duty of due diligence on its ETP 
Holders to learn the essential facts relating to every customer prior 
to trading the Shares; (c) the risks involved in trading the Shares 
during the Opening and Late Trading Sessions (as defined in Amendment 
No. 1) when an updated IIV or Index value will not be calculated or 
publicly disseminated; (d) how information regarding the IIV and Index 
value is disseminated; (e) the requirement that ETP Holders deliver a 
prospectus to investors purchasing newly issued Shares prior to or 
concurrently with the confirmation of a transaction; and (f) trading 
information.
    (14) All statements and representations made in this filing 
regarding (a) the description of the portfolio, (b) limitations on 
portfolio holdings or reference assets, or (c) the applicability of 
Exchange rules and surveillance procedures, shall constitute continued 
listing requirements for listing the Shares on the Exchange.
    (15) The issuer has represented to the Exchange that it will advise 
the Exchange of any failure by the Fund to comply with the continued 
listing requirements, and, pursuant to its obligations under Section 
19(g)(1) of the Act, the Exchange will monitor \33\ for compliance with 
the continued listing requirements. If the Fund is not in compliance 
with the applicable listing requirements, the Exchange will commence 
delisting procedures under NYSE Arca Equities Rule 5.5(m).
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    \33\ The Commission notes that certain other proposals for the 
listing and trading of shares of other exchange-traded products 
include a representation that the exchange will ``surveil'' for 
compliance with the continued listing requirements. See, e.g., 
Securities Exchange Act Release No. 77499 (April 1, 2016), 81 FR 
20428, 20432 (April 7, 2016) (SR-BATS-2016-04). In the context of 
this representation, it is the Commission's view that ``monitor'' 
and ``surveil'' both mean ongoing oversight of the Fund's compliance 
with the continued listing requirements. Therefore, the Commission 
does not view ``monitor'' as a more or less stringent obligation 
than ``surveil'' with respect to the continued listing requirements.
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This approval order is based on all of the Exchange's representations, 
including those set forth above and in Amendments No. 1, No. 2, and No. 
3.
    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Exchange Act \34\ 
and Section 11A(a)(1)(C)(iii) of the Exchange Act \35\ and the rules 
and regulations thereunder applicable to a national securities 
exchange.
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    \34\ 15 U.S.C. 78f(b)(5).
    \35\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\36\ that the proposed rule change (SR-NYSEArca-2016-100), 
as modified by Amendments No. 1, No. 2, and No. 3, be, and hereby is, 
approved.
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    \36\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\37\
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    \37\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-02089 Filed 1-31-17; 8:45 am]
BILLING CODE 8011-01-P


