[Federal Register Volume 84, Number 98 (Tuesday, May 21, 2019)]
[Notices]
[Pages 23103-23105]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-10509]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85860; File No. SR-NYSEArca-2019-02]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Instituting 
Proceedings To Determine Whether To Approve or Disapprove a Proposed 
Rule Change Relating to the Listing and Trading of the Shares of the 
ProShares UltraPro 3x Natural Gas ETF and ProShares UltraPro 3x Short 
Natural Gas ETF Under NYSE Arca Rule 8.200-E

May 15, 2019.
    On January 28, 2019, 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'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to list and trade shares of the ProShares UltraPro 
3x Natural Gas ETF and ProShares UltraPro 3x Short Natural Gas ETF 
under NYSE Arca Rule 8.200-E. The proposed rule change was published 
for comment in the Federal Register on February 15, 2019.\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. 85088 (Feb. 11, 
2019), 84 FR 4573 (``Notice'').
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    On March 26, 2019, 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 approve or disapprove the proposed 
rule change.\5\ The Commission has received no comment letters on the 
proposal.
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    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 85417 (Mar. 26, 
2019), 84 FR 12304 (Apr. 1, 2019). The Commission designated May 16, 
2019, as the date by which the Commission shall approve or 
disapprove, or institute proceedings to determine whether to approve 
or disapprove, the proposed rule change.
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    The Commission is publishing this order to institute proceedings 
pursuant to Section 19(b)(2)(B) of the Act \6\ to determine whether to 
approve or disapprove the proposed rule change.
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    \6\ 15 U.S.C. 78s(b)(2)(B).
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I. Exchange's Description of the Proposal \7\
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    \7\ The Commission notes that additional information regarding, 
among other things, the Shares, Funds, investment objective, 
permitted investments, investment strategies and methodology, 
investment restrictions, creation and redemption procedures, 
availability of information, trading rules and halts, and 
surveillance procedures, can be found in the Notice (see supra note 
3) and the Registration Statement (see infra note 9), as applicable.
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    The Exchange proposes to list and trade shares (``Shares'') of the 
ProShares UltraPro 3x Natural Gas ETF and ProShares UltraPro 3x Short 
Natural Gas ETF (individually ``Fund'' and, collectively, ``Funds'') 
under NYSE Arca Rule 8.200-E, Commentary .02, which governs the listing 
and trading of Trust Issued Receipts.\8\ Each Fund is a series of the 
ProShares Trust II (``Trust''), a Delaware statutory trust. \9\ The 
Trust and the Funds are managed and controlled by ProShare Capital 
Management LLC (``ProShare Capital'' or ``Sponsor''). ProShare Capital 
is registered as a commodity pool operator with the Commodity Futures 
Trading Commission and is a member of the National Futures Association.
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    \8\ Commentary .02 to NYSE Arca Rule 8.200-E applies to Trust 
Issued Receipts that invest in ``Financial Instruments.'' The term 
``Financial Instruments,'' as defined in Commentary .02(b)(4) to 
NYSE Arca Rule 8.200-E, 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\ The Trust is registered under the Securities Act of 1933. On 
May 19, 2017, the Trust filed with the Commission a registration 
statement on Form S-1 under the Securities Act of 1933 relating to 
the Funds (File No. 333-218136) (``Registration Statement'').
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ProShares UltraPro 3x Natural Gas ETF

    The investment objective of this Fund is to seek daily investment 
results, before fees and expenses, that correspond to three times (3x) 
the performance of the Bloomberg Natural Gas Subindex\SM\ 
(``Benchmark'').\10\ This Fund seeks to achieve its investment 
objective for a single day, not for any other period.\11\
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    \10\ The Benchmark is intended to reflect the performance of a 
rolling position in natural gas futures contracts listed on the New 
York Mercantile Exchange (``NYMEX''), including the impact of 
rolling, without regard to income earned on cash positions. The 
Benchmark is a ``rolling index,'' which means that the Index 
performance includes the impact of closing out futures contracts 
that are nearing expiration and replacing them with futures 
contracts with later expirations. This process is commonly referred 
to as ``rolling.''
    \11\ 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.

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[[Page 23104]]

ProShares UltraPro 3x Short Natural Gas ETF

    The investment objective of this Fund is to seek daily investment 
results, before fees and expenses, that correspond to three times the 
inverse (-3x) of the performance of the Benchmark. This Fund seeks to 
achieve its investment objective for a single day, not for any other 
period.

Investment Strategies of the Funds

    In seeking to achieve the Funds' investment objectives, the Sponsor 
will utilize a mathematical approach to determine the type, quantity, 
and mix of investment positions that ProShare Capital believes, in 
combination, should produce daily returns consistent with the Funds' 
respective objectives.
    Each Fund will seek to meet its respective investment objective by 
investing, under normal market conditions,\12\ in futures contracts 
traded in the United States and listed options on such contracts 
(collectively, ``Futures Contracts'').\13\ The Funds will not invest 
directly in natural gas. 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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    \12\ 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 NYSE Arca Rule 8.600-E(c)(5).
    \13\ A Futures Contract is a standardized contract traded on, or 
subject to the rules of, an exchange that calls for the future 
delivery of a specified quantity and type of a particular underlying 
asset at a specified time and place or alternatively may call for 
cash settlement. The notional size and calendar term Futures 
Contracts on a particular underlying asset are identical and are not 
subject to any negotiation, other than with respect to price and the 
number of contracts traded between the buyer and seller.
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    Each Fund also may obtain exposure to the Benchmark through 
investment in over-the-counter (``OTC'') swap transactions and forward 
contracts referencing such Benchmark (``Financial Instruments''). For 
example, a Fund may invest in Financial Instruments in the event 
position, price or accountability limits are reached with respect to 
Futures Contracts \14\ or exposure limits are reached with a particular 
futures commission merchant or 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 in 
situations where the Sponsor deems it impractical or inadvisable to buy 
or sell Futures Contracts (such as during periods of market volatility 
or illiquidity).
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    \14\ Many designated contract markets, such as the NYMEX, 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 may 
hold, own or control. In addition, NYMEX also sets price fluctuation 
limits on futures contracts. Options do not have individual price 
limits but rather are linked to the price limit of Futures 
Contracts.
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    Each Fund will also hold cash or cash equivalents, such as 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), pending investment in Futures 
Contracts or Financial Instruments or as collateral for the Funds' 
investments.
    In addition, to the extent a Fund enters into swap agreements and 
other over-the-counter transactions, it will do so only with large, 
established and well capitalized financial institutions that meet the 
Sponsor's credit quality standards and monitoring policies. Each Fund 
will use various techniques to minimize credit risk including early 
termination or reset and payment, using different counterparties and 
limiting the net amount due from any individual counterparty.
    The Funds do not intend to hold Futures Contracts through 
expiration, but instead intend to ``roll'' or close their respective 
positions before expiration. 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.'' 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 \11\ at the time of rolling such contracts 
could adversely affect a Fund with short positions and positively 
affect a Fund with long positions.
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    \11\ The Funds may invest in options on Futures Contracts. 
Unlike Futures Contracts, which the Funds intend to roll before 
expiration, the Funds intend to hold ``in-the-money'' options on 
Futures Contracts to expiration. The Funds would exercise in-the-
money options on Futures Contracts at expiration of the options 
contract and they would settle through receipt or delivery of the 
underlying Futures Contracts. Out-of-the money options will be held 
to expiration and will be expired worthless. Options on Futures 
Contracts are subject to the effects of contango and backwardation 
to the same general extent as their underlying Futures Contracts.
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II. Proceedings To Determine Whether To Approve or Disapprove SR-
NYSEArca-2019-02 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \15\ 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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    \15\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\16\ 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.'' \17\
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    \16\ Id.
    \17\ 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

[[Page 23105]]

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.\18\
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    \18\ 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 June 11, 2019. Any person who wishes to file a rebuttal 
to any other person's submission must file that rebuttal by June 25, 
2019. The Commission asks that commenters address the sufficiency of 
the Exchange's statements in support of the proposal, in addition to 
any other comments they may wish to submit about the proposed rule 
change.
    In particular, the Exchange states that each Fund may obtain 
exposure to the Benchmark through investment in OTC Financial 
Instruments under certain conditions, including situations where the 
Sponsor deems it impractical or inadvisable to buy or sell Futures 
Contracts (such as during periods of market volatility or illiquidity). 
The Commission seeks commenters' views on whether the Exchange has 
described in sufficient detail the conditions where the Sponsor deems 
it impractical or inadvisable to buy or sell Futures Contracts to 
enable the Funds to obtain exposure to the Benchmark through investment 
in OTC Financial Instruments.
    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-2019-02 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-2019-02. 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-2019-02 and should be submitted 
by June 11, 2019. Rebuttal comments should be submitted by June 25, 
2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12) & 17 CFR 200.30-3(a)(57).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-10509 Filed 5-20-19; 8:45 am]
BILLING CODE 8011-01-P


