[Federal Register Volume 83, Number 61 (Thursday, March 29, 2018)]
[Notices]
[Pages 13537-13539]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-06297]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82939; File No. SR-NYSEArca-2017-139]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Instituting 
Proceedings To Determine Whether To Approve or Disapprove a Proposed 
Rule Change To List and Trade the Shares of the ProShares Bitcoin ETF 
and the ProShares Short Bitcoin ETF Under NYSE Arca Rule 8.200-E, 
Commentary .02

March 23, 2018.
    On December 4, 2017, NYSE Arca, Inc. (``NYSE Arca'' or 
``Exchange'') 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 list and trade the shares (``Shares'') of the 
ProShares Bitcoin ETF and the ProShares Short Bitcoin ETF (each a 
``Fund'' and, collectively, ``Funds'') issued by the ProShares Trust II 
(``Trust'') under NYSE Arca Rule 8.200-E, Commentary .02. The proposed 
rule change was published for comment in the Federal Register on 
December 26, 2017.\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. 82350 (Dec. 19, 
2017), 82 FR 61100 (Dec. 26, 2017) (``Notice'').
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    The Commission has received one comment letter on the proposed rule 
change.\4\ On January 30, 2018, 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\ 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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    \4\ See Letter from Abe Kohen, AK Financial Engineering 
Consultants, LLC (Dec. 27, 2017) (``Kohen Letter''). All comments on 
the proposed rule change are available on the Commission's website 
at: https://www.sec.gov/comments/sr-nysearca-2017-139/nysearca2017139.htm.
    \5\ 15 U.S.C. 78s(b)(2).
    \6\ See Securities Exchange Act Release No. 82602 (Jan. 30, 
2018), 83 FR 4941 (Feb. 2, 2018). The Commission designated March 
26, 2018, as the date by which it should approve, 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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I. Summary of the Proposal \8\ and Comments Received
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    \8\ The Commission notes that additional information regarding 
the Trust, the Shares, and the Funds, including investment 
strategies, calculation of net asset value (``NAV'') and indicative 
fund value, creation and redemption procedures, and additional 
background information about bitcoins, the bitcoin network, and 
bitcoin futures contracts, among other things, can be found in the 
Notice (see supra note 3) and the registration statement filed with 
the Commission on Form S-1 (File No. 333-220680) under the 
Securities Act of 1933 (``Registration Statement''), as applicable.
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    The Exchange proposes to list and trade the Shares under NYSE Arca 
Rule 8.200-E, Commentary .02, which governs the listing and trading of 
Trust Issued Receipts on the Exchange.\9\ Each Fund will be a series of 
the Trust, and the Trust and the Funds will be managed and controlled 
by ProShare Capital Management LLC (``Sponsor''). Brown Brothers 
Harriman & Co. will be the custodian and administrator for the Trust. 
SEI Investments Distribution Co. will serve as the distributor of the 
Shares (``Distributor''). The Trust will offer Shares of the Funds for 
sale through the Distributor in ``Creation Units.'' \10\
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    \9\ See NYSE Arca Rule 8.200-E, Commentary .02. NYSE Arca Rule 
8.200-E permits the listing and trading of ``Trust Issued 
Receipts,'' defined as a security (1) that is used by the trust 
which holds specific securities deposited with the trust; (2) that, 
when aggregated in some specified minimum number, may be surrendered 
to the trust by the beneficial owner to receive the securities; and 
(3) that pay beneficial owners dividends and other distributions on 
the deposited securities, if any are declared and paid to the 
trustee by an issuer of the deposited securities. Commentary .02 
applies to Trust Issued Receipts that invest in 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.
    \10\ See Notice, supra note 3, at 61101.
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    According to the Exchange, the ProShares Bitcoin ETF's investment 
objective will be to seek results (before fees and expenses) that, both 
for a single day and over time, correspond to the performance of lead 
month bitcoin futures contracts \11\ listed and traded on either the 
Cboe Futures Exchange (``CFE'') or the Chicago Mercantile Exchange 
(``CME'') (``Benchmark Futures Contract''). This Fund generally intends 
to invest substantially all of its assets in the Benchmark Futures 
Contracts, but may invest in other U.S. exchange listed bitcoin futures 
contracts, if available (together with Benchmark Futures Contracts, 
collectively, ``Bitcoin Futures Contracts'').\12\
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    \11\ According to the Exchange, lead month futures contracts are 
the monthly contracts with the earliest expiration date. See Notice, 
supra note 3, at 61101, n.6. See also Notice and Registration 
Statement, supra notes 3 and 8.
    \12\ See Notice, supra note 3, at 61101.
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    In addition, the Exchange states that the ProShares Short Bitcoin 
ETF's investment objective will be to seek results, for a single day, 
that correspond (before fees and expenses) to the inverse of the daily 
performance of the Benchmark Futures Contract. This Fund generally 
intends to invest substantially all of its assets through short 
positions in Benchmark Futures Contracts, but may invest through short 
positions in Bitcoin Futures Contracts, if available.\13\
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    \13\ See id.
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    Further, the Exchange states that, in the event position, price, or 
accountability limits are reached with respect to Bitcoin Futures 
Contracts, each Fund may invest in listed options on Bitcoin Futures 
Contracts (should such listed options become available) and OTC swap 
agreements referencing Bitcoin Futures Contracts (collectively, 
``Financial Instruments'').\14\
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    \14\ See id. at 61102.
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    The Commission has received one comment letter, which expresses 
concerns about the proposed rule change.\15\ The commenter refers to 
the proposal as a ``house of cards'' and expresses concern that the 
Funds' attempt to replicate the bitcoin futures markets, which are 
related to underlying cryptocurrencies that trade on unregulated 
exchanges, will lead to losses for retail investors, and that the 
inclusion of an inverse Fund will add to the risk.\16\
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    \15\ See supra note 4 and accompanying text.
    \16\ See Kohen Letter, supra note 4.
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II. Proceedings To Determine Whether to Approve or Disapprove SR-
NYSEArca-2017-139 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \17\ 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

[[Page 13538]]

provide comments on the proposed rule change.
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    \17\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\18\ 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.'' \19\
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    \18\ Id.
    \19\ 15 U.S.C. 78f(b)(5).
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III. 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.\20\
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    \20\ 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 April 19, 2018. Any person who wishes to file a rebuttal 
to any other person's submission must file that rebuttal by May 3, 
2018. 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,\21\ in addition to any other comments they may 
wish to submit about the proposed rule change. In particular, the 
Commission seeks comment on the following:
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    \21\ See supra note 3.
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    1. What are commenters' views on whether the Exchange has 
sufficiently described how the Sponsor will select the applicable 
Benchmark Futures Contracts, given that the contracts trading on these 
two bitcoin futures exchanges have different terms (including different 
reference prices) and trade at different prices?
    2. In its proposal, the Exchange states that each Fund may, in the 
event that position, price, or accountability limits are reached with 
respect to Bitcoin Futures Contracts--or if the market for a specific 
Bitcoin Futures Contract experiences an emergency or disruption--also 
invest in Financial Instruments, which include listed options on 
Bitcoin Futures Contracts (should such listed options become available) 
and OTC swap agreements referencing Bitcoin Futures Contracts. What are 
commenters' views on the current availability of Financial Instruments 
for trading? What are commenters' views on the ability of the Funds to 
invest in Financial Instruments in the event that position, price, or 
accountability limits are reached with respect to Bitcoin Futures 
Contracts? What are commenters' views on the ability of the Funds to 
invest in Financial Instruments if the market for a specific Bitcoin 
Futures Contract experiences emergencies or disruptions?
    3. What are commenters' views on whether the Funds would have the 
information necessary to adequately value, including fair value, the 
Bitcoin Futures Contracts and related Financial Instruments when 
determining an appropriate end-of-day NAV for the Funds, taking into 
account any volatility, fragmentation, or general lack of regulation of 
the underlying bitcoin markets?
    4. What are commenters' views on the potential impact of 
manipulation in the underlying bitcoin markets on the Funds' NAV? What 
are commenters views on the potential effect of such manipulation on 
the valuation of a Fund's Bitcoin Futures Contracts, which is 
determined using the last traded price on the primary listing futures 
exchange (as opposed to the settlement price, closing price, midpoint, 
or volume weighted average price)? What are commenters' views on the 
potential effect of such manipulation on the pricing of a Fund's 
Financial Instruments?
    5. What are commenters' views on how the Funds' valuation policies 
would address the potential for the bitcoin blockchain to diverge into 
different paths (i.e., a ``fork'')?
    6. What are commenters' views on the price differentials and 
trading volumes across bitcoin trading platforms (including during 
periods of market stress) and on the extent to which these differing 
prices may affect the trading of the Bitcoin Futures Contracts and, 
accordingly, trading in the Shares of the Funds?
    7. What are commenters' views on how the substantial margin 
requirements for Bitcoin Futures Contracts, and the nature of liquidity 
and volatility in the market for Bitcoin Futures Contracts, might 
affect the Trust's ability to meet redemption orders? What are 
commenters' views on whether and how the margin requirements for 
Bitcoin Futures Contracts, and the nature of liquidity and volatility 
in the market for Bitcoin Futures Contracts, might affect a Fund's use 
of available cash to achieve its investment strategy?
    8. What are commenters' views on the possibility that the Funds--
along with other exchange-traded products with similar investment 
objectives--could acquire a substantial portion of the market for 
Bitcoin Futures Contracts or the Financial Instruments? What are 
commenters' views on whether such a concentration of holdings could 
affect the Funds' portfolio management, the liquidity of the Funds' 
respective portfolios, or the pricing of the Bitcoin Futures Contracts 
or the Financial Instruments?
    9. What are commenters' views on possible factors that might impair 
the ability of the arbitrage mechanism to keep the trading price of the 
Shares tied to the NAV of each Fund? With respect to the market for 
Bitcoin Futures Contracts, what are commenters' views on the potential 
impact on the arbitrage mechanism of the price volatility and the 
potential for trading halts? What are commenters' views on whether or 
how these potential impairments of the arbitrage mechanism may affect 
the Funds' ability to ensure adequate participation by Authorized 
Participants? What are commenters' views on the potential effects on 
investors if the arbitrage mechanism is impaired?
    10. What are commenters' views on the risks of price manipulation 
and fraud in the underlying bitcoin trading platforms and how these 
risks might affect the Bitcoin Futures Contracts market or the 
Financial Instruments? What are commenters' views on how these risks 
might affect trading in the Shares of the Funds?
    11. What are commenters' views on how an investor may evaluate the 
price of the Shares in light of the risk of

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potential price manipulation and fraud in the underlying bitcoin 
trading platforms and in light of the potentially significant spread 
between the price of the Bitcoin Futures Contracts and the spot price 
of bitcoin?
    12. What are commenters' views on whether the two bitcoin futures 
exchanges represent a significant market, i.e., a market of significant 
size?
    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 [email protected]. Please include 
File Number SR-NYSEArca-2017-139 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 Number SR-NYSEArca-2017-139. 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 website (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 website 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. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NYSEArca-2017-139 and should be 
submitted on or before April 19, 2018. Rebuttal comments should be 
submitted by May 3, 2018.
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    \22\ 17 CFR 200.30-3(a)(57).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
Brent J. Fields,
Secretary.
[FR Doc. 2018-06297 Filed 3-28-18; 8:45 am]
 BILLING CODE 8011-01-P


