[Federal Register Volume 83, Number 82 (Friday, April 27, 2018)]
[Notices]
[Pages 18603-18605]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-08852]



[[Page 18603]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83094; File No. SR-NYSEArca-2018-02]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Instituting 
Proceedings To Determine Whether To Approve or Disapprove a Proposed 
Rule Change Relating to Listing and Trading of the Direxion Daily 
Bitcoin Bear 1X Shares, Direxion Daily Bitcoin 1.25X Bull Shares, 
Direxion Daily Bitcoin 1.5X Bull Shares, Direxion Daily Bitcoin 2X Bull 
Shares and Direxion Daily Bitcoin 2X Bear Shares Under NYSE Arca Rule 
8.200-E

April 23, 2018.
    On January 4, 2018, 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 shares (``Shares'') of the following exchange-traded 
products under NYSE Arca Rule 8.200-E, Commentary .02: Direxion Daily 
Bitcoin Bear 1X Shares (``1X Bear Fund''), Direxion Daily Bitcoin 1.25X 
Bull Shares (``1.25X Bull Fund''), Direxion Daily Bitcoin 1.5X Bull 
Shares (``1.5X Bull Fund''), Direxion Daily Bitcoin 2X Bull Shares 
(``2X Bull Fund''), and Direxion Daily Bitcoin 2X Bear Shares (``2X 
Bear Fund'') (each a ``Fund,'' and collectively the ``Funds''). The 
proposed rule change was published for comment in the Federal Register 
on January 24, 2018.\3\ The Commission has received no comment letters 
on the proposed rule change.
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    \1\ 15 U.S.C.78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 82532 (Jan. 18, 
2018), 83 FR 3380 (Jan. 24, 2018) (``Notice'').
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    On March 1, 2018, 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\ This order institutes proceedings under Section 19(b)(2)(B) 
of the Act \6\ to determine whether to approve or disapprove the 
proposed rule change.
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    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 82795 (Mar. 1, 
2018), 83 FR 9768 (Mar. 7, 2018). The Commission designated April 
24, 2018, as the date by which it should approve, disapprove, or 
institute proceedings to determine whether to disapprove the 
proposed rule change.
    \6\ 15 U.S.C. 78s(b)(2)(B).
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I. Summary of the Proposal \7\
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    \7\ The Commission notes that additional information regarding 
the Trust (as defined herein), 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 Notice, supra note 3. The registration 
statement was filed confidentially with the Commission on Form S-1 
(``Registration Statement'') under the Securities Act of 1933 
(``Securities Act''). The Exchange represents that the Registration 
Statement, and all amendments thereto, will be publicly filed not 
later than 21 days before the date on which the issuer conducts a 
road show, as such term is defined in Rule 433(h)(4) under the 
Securities Act.
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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.\8\ Each Fund will be a series of 
the Direxion Shares ETF Trust II (``Trust''), and the Trust and the 
Funds will be managed and controlled by Direxion Asset Management, LLC 
(``Sponsor''). Bank of New York Mellon will be the custodian and 
transfer agent for the Funds. U.S. Bancorp Fund Services, LLC will 
serve as the administrator for the Funds, and Foreside Fund Services, 
LLC will serve as the distributor of the Shares (``Distributor'').
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    \8\ 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.
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    According to the Exchange, the Funds will seek to obtain daily 
short, leveraged long, or leveraged short exposure (before fees and 
expenses) to the target benchmark, which is the lead-month bitcoin 
futures contract traded on the Chicago Mercantile Exchange (``CME'') or 
Cboe Global Markets, Inc. (``CBOE'') or on any other U.S. exchange that 
subsequently trades bitcoin futures contracts (``Bitcoin Futures 
Contract'').\9\ Specifically, the 1.25X Bull Fund, the 1.5X Bull Fund, 
and the 2X Bull Fund will seek daily investment results (before fees 
and expenses) that are 125%, 150%, or 200%, respectively, of the daily 
return of the target benchmark.\10\ The 1X Bear Fund and the 2X Bear 
Fund will seek daily inverse investment results (before fees and 
expenses) that are -100% or -200%, respectively, of the daily return of 
the target benchmark.\11\
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    \9\ Bitcoin Futures Contracts will be cash-settled. The ``lead 
month'' contract is the monthly contract with the earliest 
expiration date. See Notice, supra note 3, at 3381, n.6.
    \10\ See Notice, supra note 3, at 3382.
    \11\ See id.
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    The target benchmark's value will be calculated as the last sale 
price published by the CME or the CBOE, or any other U.S. exchange that 
subsequently trades bitcoin futures contracts, on or before 11:00 a.m. 
E.T. for the Bitcoin Futures Contract and may reflect trades occurring 
and published by the CME or CBOE or another U.S. exchange that 
subsequently trades bitcoin futures contracts outside the normal 
trading session for the Bitcoin Futures Contract.\12\ The Funds will 
compute their NAV as of 11:00 a.m. E.T., or such earlier time that the 
NYSE may close.\13\
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    \12\ See id. at 3381.
    \13\ See id. at 3383.
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    Each Fund, under normal market conditions, will seek to achieve its 
daily investment objective by investing in the Bitcoin Futures 
Contract, swaps on the Bitcoin Futures Contract, or listed options on 
bitcoin or the Bitcoin Futures Contract (collectively, ``Bitcoin 
Financial Instruments''). The Funds' investments in Bitcoin Financial 
Instruments will be used to produce economically ``leveraged'' or 
``inverse leveraged'' investment results for the Funds.\14\ A Fund may 
invest in the listed options and swaps described above in a manner 
consistent with its investment objective in situations where the 
Sponsor believes that investing in such financial instruments is in the 
best interests of a Fund. In addition, a Fund may invest in swap 
contracts referencing the Bitcoin Futures Contract if the market for a 
specific bitcoin futures contract experiences emergencies or if 
position, price, or accountability limits (if any) are reached with 
respect to a specific bitcoin futures contract. Each trading day at the 
close of the U.S. equity markets, each Fund will position its portfolio 
to ensure that the Fund's exposure to the target benchmark is 
consistent with the Fund's investment objective.\15\
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    \14\ See id. at 3381-82.
    \15\ See id.
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    Assets of each Fund not invested in Bitcoin Financial Instruments 
will be held in cash or invested in cash equivalents, such as U.S. 
Treasury Securities or other high credit quality short-term, fixed-
income, or similar securities (including shares of money market funds, 
bank deposits, bank

[[Page 18604]]

money market accounts, certain variable rate-demand notes, and 
repurchase agreements collateralized by government securities) that 
serve as collateral for, or pending investments in, the Funds' 
investments.\16\
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    \16\ See id. at 3383.
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    According to the Exchange, each Fund will create and redeem Shares 
in one or more Creation Units (a Creation Unit is a block of 50,000 
Shares of a Fund). A creation transaction, which is subject to 
acceptance by the Distributor, generally takes place when an Authorized 
Participant deposits a specified amount of cash in exchange for a 
specified number of Creation Units. Similarly, Shares can be redeemed 
only in Creation Units, generally for cash. Only Authorized 
Participants may purchase and redeem Shares from a Fund.\17\
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    \17\ See id. at 3384.
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II. Proceedings To Determine Whether To Approve or Disapprove SR-
NYSEArca-2018-02 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \18\ 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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    \18\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\19\ 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.'' \20\
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    \19\ Id.
    \20\ 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.\21\
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    \21\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Public Law 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 May 18, 2018. Any person who wishes to file a rebuttal 
to any other person's submission must file that rebuttal by June 1, 
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,\22\ 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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    \22\ See Notice, 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 
Bitcoin Futures Contract, given that the bitcoin futures contracts 
trading on the two named bitcoin futures exchanges (or on any other 
U.S. exchange that subsequently trades bitcoin futures contracts) have 
different terms (including different reference prices) and trade at 
different prices, and given that any bitcoin futures contracts 
subsequently listed on a U.S. exchange may likewise have different 
terms or trade at different prices?
    2. In its proposal, the Exchange states that each Fund will seek to 
achieve its daily investment objective by investing in Bitcoin 
Financial Instruments, which include the Bitcoin Futures Contract, 
swaps on the Bitcoin Futures Contract, or listed options on bitcoin or 
the Bitcoin Futures Contract. What are commenters' views on the current 
availability of these swaps or listed options? What are commenters' 
views on the ability of the Funds to invest in these swaps or listed 
options in the event that position, price, or accountability limits are 
reached with respect to any bitcoin futures contracts? What are 
commenters' views on the ability of the Funds to invest in these swaps 
or listed options if an underlying futures market 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 Financial Instruments when determining an appropriate 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 Financial Instruments, which is 
determined using the last sale price for the Bitcoin Futures Contract 
on the applicable U.S. 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 non-exchange-traded Bitcoin Financial 
Instruments? What are commenters' views on the potential effect of 
manipulation on the valuation of a Fund's portfolio in cases where, 
according to the Exchange, the target benchmark's value reflects trades 
occurring outside the normal trading session for the Bitcoin Futures 
Contract?
    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 Bitcoin Financial Instruments 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

[[Page 18605]]

whether and how the margin requirements for bitcoin futures contracts 
may 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 some 
or all of the Bitcoin 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 some or all of the Bitcoin 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? What are commenters' views on 
whether determining the value of the Funds' benchmark, or striking the 
Funds' NAV, as of 11:00 a.m. E.T. might affect the arbitrage mechanism 
during the remainder of the trading day? With respect to the markets 
for Bitcoin Financial Instruments, 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 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 potential price 
manipulation and fraud in the underlying bitcoin trading platforms and 
in light of the potentially significant spread between the price of 
Bitcoin Financial Instruments and the spot price of bitcoin?
    12. What are commenters' views on whether the two named bitcoin 
futures exchanges represent a significant market, i.e., a market of 
significant size?
    13. With respect to the Funds that seek leveraged or leveraged-
inverse returns, would trading of the Shares, hedging activity, or 
creation and redemption activity affect the daily volume, volatility, 
or liquidity of the underlying Bitcoin Financial Instruments or of the 
spot bitcoin market any differently than a non-leveraged bitcoin 
futures exchange-traded product would? If so, why, how, and to what 
extent? Would any such effect be different during periods of downward 
market movement or high volatility? If so, why, how, and to what 
extent?
    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-2018-02 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-2018-02. 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-2018-02 and should be submitted 
by May 18, 2018. Rebuttal comments should be submitted by June 1, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(57).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-08852 Filed 4-26-18; 8:45 am]
 BILLING CODE 8011-01-P


