[Federal Register Volume 83, Number 234 (Thursday, December 6, 2018)]
[Notices]
[Pages 62939-62941]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-26403]


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SECURITIES AND EXCHANGE COMMISSION

[Securities Exchange Act of 1934; Release No. 34-84676/November 29, 
2018]


In the Matter of the NYSE Arca, Inc.; for an Order Granting the 
Approval of Proposed Rule Change To List and Trade Shares of the 
ForceShares Daily 4X US Market Futures Long Fund and ForceShares Daily 
4X US Market Futures Short Fund Under Commentary .02 to NYSE Arca 
Equities Rule 8.200 (SR-NYSEArca-2016-120); Request for Additional 
Comment

    On October 17, 2016, NYSE Arca, Inc. (``NYSE Arca'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities

[[Page 62940]]

Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to list and trade shares of the ForceShares Daily 
4X US Market Futures Long Fund and ForceShares Daily 4X US Market 
Futures Short Fund (``ForceShares ETPs'') under Commentary .02 to NYSE 
Arca Equities Rule 8.200. On November 4, 2016, the proposal was 
published for comment in the Federal Register.\3\ On December 14, 2016, 
the Division of Trading and Markets, for the Commission pursuant to 
delegated authority, extended the time period for Commission action on 
the proposed rule change.\4\ On February 1, 2017, the Division of 
Trading and Markets, for the Commission pursuant to delegated 
authority, instituted proceedings to determine whether to approve or 
disapprove the proposed rule change.\5\ On April 20, 2017, NYSE Arca 
submitted Amendment No. 3 to the proposed rule change, which replaced 
and superseded the proposed rule change as modified by previous 
amendments.\6\ No comments on the proposed rule change were received. 
On May 2, 2017, the Division of Trading and Markets, for the Commission 
pursuant to delegated authority,\7\ approved the proposed rule change, 
as modified by Amendment No. 3 (``May 2, 2017 Order'').\8\
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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. 79201 (October 31, 
2016), 81 FR 76977 (November 4, 2016) (SR-NYSEArca-2016-120).
    \4\ See Securities Exchange Act Release No. 79550 (December 14, 
2016), 81 FR 92892 (December 20, 2016).
    \5\ See Securities Exchange Act Release No. 79914 (February 1, 
2017), 82 FR 9625 (February 7, 2017).
    \6\ Amendment No. 3 replaced and superseded the proposed rule 
change as modified by Amendment No. 2. Amendment No. 2 had 
previously replaced and superseded the proposed rule change as 
modified by Amendment No. 1. Amendment No. 1 replaced and superseded 
the original filing in its entirety.
    \7\ 17 CFR 200.30-3(a)(12).
    \8\ See Securities Exchange Act Release No. 80579 (May 2, 2017), 
82 FR 21443 (May 8, 2017).
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    On May 12, 2017, the Secretary of the Commission notified the 
Exchange that pursuant to Rule 431 of the Commission's Rules of 
Practice,\9\ the Commission would review the delegated action and that 
the May 2, 2017 Order was stayed until the Commission ordered 
otherwise.\10\ On May 25, 2017, the Commission issued an order 
scheduling filing of statements on review (``May 25, 2017 Order''), in 
which the Commission ordered that any party or other person may file 
any additional statement by June 15, 2017. The Commission further 
ordered that the May 2, 2017 Order shall remain stayed pending further 
order of the Commission. The Commission received six comment letters in 
response to the May 25, 2017 Order that support approval of the 
proposed rule change.\11\
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    \9\ 17 CFR 201.431.
    \10\ See letter to Elizabeth King, General Counsel and Corporate 
Secretary, New York Stock Exchange, from Brent J. Fields, Secretary, 
Commission, dated May 12, 2017, available at https://www.sec.gov/rules/sro/nysearca/2017/34-80770-letter-from-secretary.pdf.
    \11\ See letters to Brent J. Fields, Secretary, Commission, from 
Boris Ilyevsky, dated June 5, 2017; Kris Wallace, Member, 
ForceShares LLC, dated June 13, 2017; Douglas M. Yones, Head of 
Exchange Traded Products, New York Stock Exchange, dated June 13, 
2017; Jonathan Yao, CEO, SogoTrade, Inc., dated June 14, 2017; and 
Kris Wallace, Member, ForceShares LLC, dated July 24, 2017 
(``ForceShares Letter''); and letter to Commission, from James J. 
Angel, Associate Professor of Finance, Georgetown University, dated 
July 10, 2017.
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    In response to the May 25, 2017 Order, one commenter cited a 
working paper from staff of the Federal Reserve Board regarding the 
impact of leveraged and inverse exchange-traded products (``ETPs'') on 
the underlying market, and quoted the following statements from the 
paper: (a) ``capital flows substantially reduce the need for ETFs to 
rebalance when returns are large in magnitude and, therefore, mitigate 
the potential for these products to amplify volatility. We also show 
theoretically that flows can completely eliminate ETF rebalancing in 
the limit'' and (b) ``[l]everaged and inverse ETFs have received heavy 
criticism based on the belief that they exacerbate volatility in 
financial markets. We show that concerns about these types of products 
are likely exaggerated. Empirically, we find that capital flows 
considerably reduce ETF rebalancing demand and, therefore, mitigate the 
potential for ETFs to amplify volatility. Our analysis has relevant and 
timely policy implications, as regulators are reportedly considering 
changes to how ETFs are regulated.'' \12\
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    \12\ See ForceShares Letter at 5 (quoting Ivan T. Ivanov and 
Stephen L. Lenkey, Are Concerns About Leveraged ETFs Overblown? 
(Finance and Economics Discussion Series, Divisions of Research & 
Statistics and Monetary Affairs, Federal Reserve Board, Washington, 
DC, Working Paper 2014-106) (``Ivanov and Lenkey Paper'')).
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    The Commission believes that questions and concerns remain 
regarding the potential systemic impact of the ForceShares ETPs. In 
particular, the amount of rebalancing activity for a leveraged or 
inverse ETP increases significantly as the ETP's leverage ratio and net 
assets increase. Moreover, the rebalancing activities of both leveraged 
and inverse ETPs are in the same direction as the movement in the 
reference asset (i.e., they sell when the market is going down and buy 
when the market is going up), which could potentially further 
exacerbate market movements, particularly during periods of high market 
volatility. Because the ForceShares ETPs would have 4X and -4X 
leverage, they would have greater rebalancing activities than existing 
ETPs that have lower leverage ratios per dollar of net assets under 
management. In particular, there are questions concerning whether 
rebalancing activities of the ForceShares ETPs could potentially result 
in significant additional market volatility as compared to existing 
ETPs, and interfere with fair and orderly markets. This raises a 
potential concern that the listing and trading of shares of the 
ForceShares ETPs may not be consistent with Section 6(b)(5) of the Act, 
which requires, among other things, that the rules of a national 
securities exchange be designed to protect investors and the public 
interest.
    The Commission notes that another working paper from staff of the 
Federal Reserve Board suggests that the rebalancing activities of 
leveraged and inverse ETPs increase volatility in the underlying 
securities.\13\ In particular, that working paper suggests that the 
rebalancing activities of leveraged and inverse ETPs in response to a 
large market move, especially in periods of high volatility, could pose 
market risks.
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    \13\ See Tugkan Tuzun, Are Leveraged and Inverse ETFs the New 
Portfolio Insurers? (Board of Governors of the Federal Reserve 
System, Working Paper May 28, 2014) (``Tuzun Paper'').
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    The Commission invites additional written views of interested 
persons concerning whether the proposed rule change is consistent with 
Section 6(b)(5) or any other provision of the Act, or the rules and 
regulations thereunder. In particular, the Commission requests that 
interested persons provide additional written submissions of their 
views, data, and arguments with respect to the market impact issue 
identified above (including the market impact issue discussed in the 
Ivanov and Lenkey Paper and the Tuzun Paper), as well as any other 
comments they wish to submit regarding the proposed rule change. In 
particular, the Commission seeks comment, including, where relevant, 
any specific data, statistics, or studies, on the following:
    1. Would the rebalancing activities of the ForceShares ETPs impact 
daily volatility of the portfolio holdings, the underlying index, or 
the underlying names comprising the index (together ``underlying 
assets'')? \14\ If so, how?
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    \14\ As explained in Amendment No. 3 to the proposed rule 
change, under normal market conditions, each ForceShares ETP may 
invest in Standard & Poor's 500 Stock Price Index Futures contracts 
(``Big S&P Contracts''), E-Mini S&P 500 Futures contracts (``E-
Minis'' and, together with Big S&P Contracts, ``Primary S&P 
Interests''), swap agreements referencing Primary S&P Interests or 
the S&P 500 Index, over-the-counter forward contracts referencing 
Primary S&P Interests, options on Primary S&P Interests, and certain 
``Cash Equivalents.'' For more information regarding the ForceShares 
ETPs, see Amendment No. 3, available at https://www.sec.gov/comments/sr-nysearca-2016-120/nysearca2016120-1714666-150363.pdf.

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[[Page 62941]]

    2. How much additional end-of-day trading volume in the underlying 
assets would the ForceShares ETPs potentially add? How much volume has 
existing leveraged and inverse ETPs added to end-of-day trading in 
their underlying assets?
    3. Would the trading activity relating to the ForceShares ETPs 
exacerbate market movements or market volatility? Why or why not?
    4. What type of hedging exposure is expected to arise from trading 
activity in these products?
    5. How would this hedging exposure change or otherwise react to 
significant down market moves? For example, how might such hedging 
exposure be adjusted?
    6. Would the listing and trading of shares of the ForceShares ETPs 
change the current leveraged and inverse ETP market? If so, how?
    7. Do investors have access to information sufficient to fully 
understand the operation and risks of the ForceShares ETPs?
    It is ordered that by December 20, 2018, any party or other person 
may file any additional statement.

    By the Commission.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-26403 Filed 12-4-18; 8:45 am]
 BILLING CODE 8011-01-P


