
[Federal Register Volume 82, Number 90 (Thursday, May 11, 2017)]
[Notices]
[Pages 22042-22044]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-09522]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80606; File No. SR-NYSEArca-2017-05]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Instituting 
Proceedings To Determine Whether To Approve or Disapprove a Proposed 
Rule Change To List and Trade Shares of Direxion Daily Crude Oil Bull 
3x Shares and Direxion Daily Crude Oil Bear 3x Shares Under NYSE Arca 
Equities Rule 8.200

May 5, 2017.

I. Introduction

    On January 23, 2017, NYSE Arca, Inc. (``Exchange'' or ``NYSE 
Arca'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) \1\ of the Securities 
Exchange Act of 1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ a 
proposed rule change to list and trade shares (``Shares'') of Direxion 
Daily Crude Oil Bull 3x Shares and Direxion Daily Crude Oil Bear 3x 
Shares (each a ``Fund,'' and collectively the ``Funds'') under NYSE 
Arca Equities Rule 8.200. The proposed rule change was published for 
comment in the Federal Register on February 7, 2017.\4\ On March 16, 
2017, pursuant to Section 19(b)(2) of the Act,\5\ 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.\6\ The 
Commission has received no comments on the proposed rule change. This 
order institutes proceedings under Section 19(b)(2)(B) of the Act \7\ 
to determine whether to approve or disapprove the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
    \4\ See Securities Exchange Act Release No. 79916 (February 1, 
2017), 82 FR 9608 (``Notice'').
    \5\ 15 U.S.C. 78s(b)(2).
    \6\ See Securities Exchange Act Release No. 80265 (March 22, 
2017), 82 FR 14778. The Commission designated May 8, 2017 as the 
date by which the Commission shall either approve or disapprove, or 
institute proceedings to determine whether to disapprove, the 
proposed rule change.
    \7\ 15 U.S.C. 78s(b)(2)(B).
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II. Exchange's Description of the Proposal

    The Exchange proposes to list and trade Shares of the Funds under 
NYSE Arca Equities Rule 8.200, Commentary .02, which governs the 
listing and trading of Trust Issued Receipts.\8\ Each Fund is a series 
of the Direxion Shares ETF Trust II (``Trust''), a Delaware statutory 
trust.\9\ The Trust and the Funds are managed and controlled by 
Direxion Asset Management, LLC (``Sponsor'').\10\ Bank of New York 
Mellon will be the custodian and transfer agent for the Funds. U.S. 
Bancorp Fund Services, LLC is the administrator for the Funds. Foreside 
Fund Services, LLC serves as the distributor of the Shares.
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    \8\ Commentary .02 to NYSE Arca Equities Rule 8.200 applies to 
Trust Issued Receipts that invest in ``Financial Instruments.'' The 
term ``Financial Instruments,'' as defined in Commentary .02(b)(4) 
to NYSE Arca Equities Rule 8.200, means any combination of 
investments, including cash; securities; options on securities and 
indices; futures contracts; options on futures contracts; forward 
contracts; equity caps, collars, and floors; and swap agreements.
    \9\ According to the Exchange, on December 14, 2016, the Trust 
filed with the Commission a registration statement on Form S-1 under 
the Securities Act of 1933, as amended, relating to the Funds (File 
No. 333-215091) (``Registration Statement'').
    \10\ According to the Exchange, the Sponsor is registered as a 
commodity pool operator with the Commodity Futures Trading 
Commission and is a member of the National Futures Association. See 
Notice, supra note 4, 82 FR at 9608.
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    The Exchange has made the following representations and statements 
in describing the Funds and their investment strategies, including the 
Funds' portfolio holdings and investment restrictions.\11\
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    \11\ The Commission notes that additional information regarding 
the Trust, the Funds, and the Shares, including investment 
strategies, risks, net asset value (``NAV'') calculation, creation 
and redemption procedures, fees, availability of information, 
trading rules and halts, surveillance, information bulletins, 
distributions, and taxes, among other information, is included in 
the Notice and the Registration Statement, as applicable. See Notice 
and Registration Statement, supra notes 4 and 9, respectively.
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A. Investment Objectives of the Funds

    The investment objective of the Direxion Daily Crude Oil Bull 3X 
Shares is to seek, on a daily basis,\12\ investment results that 
correspond (before fees and expenses) to a multiple three times (3x) of 
the daily performance of the Bloomberg WTI Crude Oil Subindex\SM\ (a 
subindex of the Bloomberg Commodity Index\SM\) (``Benchmark'').\13\ The 
investment objective of the Direxion Daily Crude Oil Bear 3X Shares is 
to seek, on a daily basis,\14\ investment results that correspond 
(before fees and expenses) to three times (3x) the inverse of the 
performance of the Benchmark. The Benchmark is intended to reflect the 
performance of crude oil as measured by the price of West Texas 
Intermediate crude oil futures contracts traded on the New York 
Mercantile Exchange (which is part of the Chicago Mercantile Exchange), 
including the impact of rolling,\15\ without regard to income earned on 
cash positions. According to the Exchange, the Funds will not be 
directly linked to the ``spot'' price of crude oil.\16\
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    \12\ According to the Exchange, the Funds do not seek to achieve 
their investment objectives over a period greater than a single 
trading day. The Exchange states that a single trading day is 
measured from the time a Fund calculates its NAV to the time of a 
Fund's next NAV calculation. The Exchange states that the return of 
a Fund for a period longer than a single trading day is the result 
of its return for each day compounded over the period and thus will 
usually differ from a Fund's multiple times the return of the 
Benchmark for the same period. See Notice, supra note 4, 82 FR at 
9609.
    \13\ According to the Exchange, the Benchmark is a ``rolling 
index,'' which means that the index does not take physical 
possession of any commodities. See id. at 9609 n.7.
    \14\ See supra note 12.
    \15\ The Exchange states that futures contracts held by the 
Funds near expiration are generally closed out and replaced by 
contracts with a later expiration as required by the Benchmark. The 
Exchange states that this process is referred to as ``rolling,'' and 
that the Funds do not intend to hold futures contracts through 
expiration, but instead to ``roll'' their respective positions. See 
Notice, supra note 4, 82 FR at 9609 n.8.
    \16\ See id. at 9609.
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B. Investments of the Funds

    In seeking to achieve the Funds' investment objectives, the 
Exchange states that the Sponsor will utilize a mathematical approach 
to determine the type, quantity, and mix of investment positions that 
the Sponsor believes, in combination, should produce daily returns 
consistent with the Funds' respective objectives.\17\ The Sponsor would 
rely on a pre-determined model to generate orders that result in 
repositioning the Funds' investments in accordance with their 
respective investment objectives.
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    \17\ See id.
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    According to the Exchange, each Fund will seek to achieve its 
investment objectives by investing, under normal market conditions,\18\ 
substantially all of

[[Page 22043]]

its assets in oil futures contracts traded in the U.S. and listed 
options on such contracts (such futures contracts and options are 
collectively referred to as ``Futures Contracts''). The Funds' 
investments in Futures Contracts will be used to produce economically 
``leveraged'' or ``inverse leveraged'' investment results for the 
Funds.
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    \18\ The Exchange states that the term ``normal market 
conditions'' includes, but is not limited to, the absence of trading 
halts in the applicable financial markets generally; operational 
issues (e.g., systems failure) causing dissemination of inaccurate 
market information; or force majeure type events such as natural or 
manmade disaster, act of God, armed conflict, act of terrorism, riot 
or labor disruption or any similar intervening circumstance. See id. 
at 9609 n.11.
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    In the event position or accountability limits are reached with 
respect to Futures Contracts,\19\ each Fund may obtain exposure to the 
Benchmark through investment in swap transactions and forward contracts 
referencing the Benchmark or other benchmarks the Sponsor believes 
should be closely correlated to the performance of each Fund's 
benchmark, such as the Energy Select Sector Index or the S&P Oil & Gas 
Exploration & Production Select Industry Index (such swap transactions 
and forward contracts are collectively referred to as ``Financial 
Instruments''). To the extent that the Trust invests in Financial 
Instruments, it would first make use of exchange-traded Financial 
Instruments, if available. If an investment in exchange-traded 
Financial Instruments is unavailable, then the Trust would invest in 
Financial Instruments that clear through derivatives clearing 
organizations that satisfy the Trust's criteria, if available. If an 
investment in cleared Financial Instruments is unavailable, then the 
Trust would invest in other Financial Instruments, including uncleared 
Financial Instruments in the over-the-counter (``OTC'') market. The 
Funds may also invest in Financial Instruments if the market for a 
specific futures contract experiences emergencies (e.g., natural 
disaster, terrorist attack, or an act of God) or disruptions (e.g., a 
trading halt or a flash crash) that prevent or make it impractical for 
a Fund to obtain the appropriate amount of investment exposure using 
Futures Contracts.
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    \19\ According to the Exchange, U.S. futures exchanges have 
established accountability levels and position limits on the maximum 
net long or net short Futures Contracts in commodity interests that 
any person or group of persons under common trading control (other 
than as a hedge, which an investment by a Fund is not) may hold, 
own, or control. These levels and position limits apply to the 
Futures Contracts that each Fund would invest in to meet its 
investment objective. According to the Exchange, in addition to 
accountability levels and position limits, U.S. futures exchanges 
also set daily price fluctuation limits on Futures Contracts. The 
daily price fluctuation limit establishes the maximum amount that 
the price of a Futures Contract may vary either up or down from the 
previous day's settlement price. See id. at 9609.
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    The Funds will invest such that each Fund's exposure to the 
Benchmark will consist substantially of Futures Contracts. The Funds' 
remaining net assets may be invested in cash or cash equivalents and/or 
U.S. Treasury securities or other high credit quality, short-term 
fixed-income or similar securities (such as shares of money market 
funds and collateralized repurchase agreements) for direct investment 
or as collateral for the Funds' investments.
    The Funds do not intend to hold Futures Contracts through 
expiration, but instead to ``roll'' their respective positions.\20\
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    \20\ The Exchange states that when the market for these 
contracts is such that the prices are higher in the more distant 
delivery months than in the nearer delivery months, the sale during 
the course of the ``rolling process'' of the more nearby contract 
would take place at a price that is lower than the price of the more 
distant contract. This pattern of higher futures prices for longer 
expiration Futures Contracts is referred to as ``contango.'' 
Alternatively, when the market for these contracts is such that the 
prices are higher in the nearer months than in the more distant 
months, the sale during the course of the ``rolling process'' of the 
more nearby contract would take place at a price that is higher than 
the price of the more distant contract. This pattern of higher 
futures prices for shorter expiration futures contracts is referred 
to as ``backwardation.'' According to the Exchange, the presence of 
contango in certain Futures Contracts at the time of rolling could 
adversely affect a Fund with long positions, and positively affect a 
Fund with short positions. Similarly, the presence of backwardation 
in certain futures contracts at the time of rolling such contracts 
could adversely affect a Fund with short positions and positively 
affect a Fund with long positions. See id.
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    The Exchange states that the Funds do not expect to have leveraged 
exposure greater than three times (3x) the Funds' net assets. Thus, the 
maximum margin held at a Future Commission Merchant would not exceed 
three times the margin requirement for either Fund.\21\
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    \21\ See id.
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    The Exchange represents that not more than 10% of the net assets of 
a Fund in the aggregate invested in Futures Contracts shall consist of 
Futures Contracts whose principal market is not a member of the 
Intermarket Surveillance Group or is a market with which the Exchange 
does not have in place a comprehensive surveillance sharing agreement.

III. Proceedings To Determine Whether To Approve or Disapprove SR-
NYSEArca-2017-05 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \22\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of such 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the proposed rule change. Institution of proceedings 
does not indicate that the Commission has reached any conclusions with 
respect to any of the issues involved. Rather, as described below, the 
Commission seeks and encourages interested persons to provide comments 
on the proposed rule change.
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    \22\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\23\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposed rule change's consistency with Section 6(b)(5) 
of the Act, which requires, among other things, that the rules of a 
national securities exchange be ``designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade,'' and ``to protect investors and the public 
interest.'' \24\
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    \23\ Id.
    \24\ 15 U.S.C. 78f(b)(5).
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    Under the proposal, each Fund will seek to achieve its investment 
objective by investing in Financial Instruments, which, according to 
the Exchange, could include uncleared OTC swap transactions and forward 
contracts.\25\ The Exchange states that each Fund's total portfolio 
composition will be disclosed each business day that the Exchange is 
open for trading on the Funds' Web site. The Web site disclosure will 
include, with respect to the Futures Contracts and Financial 
Instruments, their name, percentage weighting, and value. The 
Commission seeks commenters' views on the sufficiency of the 
information that would be provided with respect to each Fund's 
Financial Instruments, and whether the information will allow market 
participants to value these interests intraday.
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    \25\ See Notice, supra note 4, at 9609.
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    In addition, under the proposal, the investment objective of the 
Direxion Daily Crude Oil Bull 3X Shares is to seek, on a daily basis, 
investment results that correspond (before fees and expenses) to a 
multiple three times (3x) of the daily performance of the Benchmark, 
and the investment objective of the Direxion Daily Crude Oil Bear 3X 
Shares is to seek, on a daily basis, investment results that correspond 
(before fees and expenses) to three times (3x) the inverse of the 
performance of the Benchmark. The Exchange's filing does not address 
whether the value of the Benchmark will be publicly disseminated, and, 
if

[[Page 22044]]

so, by whom and how often. The Commission seeks commenters' views on 
the sufficiency of the Exchange's discussion regarding dissemination of 
the value of the Benchmark on which the investment objectives of the 
Funds are based.
    Furthermore, in its filing the Exchange fails to include a 
representation that all statements and representations in the proposal 
regarding the applicability of Exchange listing rules specified in the 
proposal shall constitute continued listing requirements for listing 
the Shares on the Exchange.\26\ The Commission seeks commenter's views 
on whether the Exchange's statements in the filing relating to the 
applicability of continued listing requirements for listing and trading 
of the Shares on the Exchange are sufficient to support a determination 
that the listing and trading of the Shares would be consistent with 
Section 6(b)(5) of the Act.
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    \26\ The Commission notes that the Exchange has made this 
representation in other proposed rule changes to list and trade 
Trust Issued Receipts. See, e.g., Amendment No. 1 to Securities 
Exchange Act Release No. 79917 (February 1, 2017), 82 FR 9620 
(February 7, 2017) (SR-NYSEArca-2017-07), available at: https://www.sec.gov/comments/sr-nysearca-2017-07/nysearca201707-1630210-137426.pdf; Amendment No. 2 to Securities Exchange Act Release No. 
79742 (January 5, 2017), 82 FR 3366 (January 11, 2017) (SR-NYSEArca-
2016-173), available at: https://www.sec.gov/comments/sr-nysearca-2016-173/nysearca2016173-1678044-149322.pdf.
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IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposal is 
consistent with Section 6(b)(5) or any other provision of the Act, or 
the rules and regulations thereunder. Although there do not appear to 
be any issues relevant to approval or disapproval that would be 
facilitated by an oral presentation of views, data, and arguments, the 
Commission will consider, pursuant to Rule 19b-4, any request for an 
opportunity to make an oral presentation.\27\
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    \27\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Pub. L. 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by June 12, 2017. Any person who wishes to file a rebuttal 
to any other person's submission must file that rebuttal by June 26, 
2017. The Commission asks that commenters address the sufficiency of 
the Exchange's statements in support of the proposal, which are set 
forth in the Notice,\28\ in addition to any other comments they may 
wish to submit about the proposed rule change.
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    \28\ See supra note 4.
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    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NYSEArca-2017-05 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Numbers SR-NYSEArca-2017-05. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NYSEArca-2017-05 and should 
be submitted on or before June 12, 2017 Rebuttal comments should be 
submitted by June 26, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\29\
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    \29\ 17 CFR 200.30-3(a)(57).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-09522 Filed 5-10-17; 8:45 am]
 BILLING CODE 8011-01-P


