[Federal Register Volume 85, Number 82 (Tuesday, April 28, 2020)]
[Notices]
[Pages 23581-23583]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-08937]



[[Page 23581]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88726; File No. SR-CboeBZX-2020-003]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of 
Filing of Amendment No. 2 and Order Instituting Proceedings To 
Determine Whether To Approve or Disapprove a Proposed Rule Change, as 
Modified by Amendment No. 2, To List and Trade Shares of the -1x Short 
VIX Futures ETF Under BZX Rule 14.11(f)(4), Trust Issued Receipts

April 22, 2020.

I. Introduction

    On January 3, 2020, Cboe BZX Exchange, Inc. (``Exchange'' or 
``BZX'') 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 -1x 
Short VIX Futures ETF (``Fund''), a series of VS Trust (``Trust''), 
under BZX Rule 14.11(f)(4) (Trust Issued Receipts). The proposed rule 
change was published for comment in the Federal Register on January 23, 
2020.\3\ On February 25, 2020, 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\ On March 24, 2020, the Exchange filed 
Amendment No. 1 to the proposed rule change, which replaced and 
superseded the proposed rule change as originally filed.\6\ On April 
13, 2020, the Exchange filed Amendment No. 2 to the proposed rule 
change, which replaced and superseded the proposed rule change, as 
modified by Amendment No. 1.\7\ The Commission has received no comments 
on the proposed rule change. The Commission is publishing this notice 
and order to solicit comments on the proposed rule change, as modified 
by Amendment No. 2, from interested persons and to institute 
proceedings pursuant to Section 19(b)(2)(B) of the Act \8\ to determine 
whether to approve or disapprove the proposed rule change, as modified 
by Amendment No. 2.
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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. 87992 (January 16, 
2020), 85 FR 4023.
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 88276, 85 FR 12353 
(March 2, 2020). The Commission designated April 22, 2020 as the 
date by which the Commission shall approve or disapprove, or 
institute proceedings to determine whether to disapprove, the 
proposed rule change.
    \6\ Amendment No. 1 is available at: https://www.sec.gov/comments/sr-cboebzx-2020-003/srcboebzx2020003-6993242-214730.pdf.
    \7\ In Amendment No. 2, the Exchange: (i) Clarified that the 
primary investments of the Fund will be VIX Futures Contracts (as 
defined herein) based on components of the Index (as defined 
herein); (ii) clarified that the Fund will collateralize its 
obligations with Cash and Cash Equivalents (as defined herein) 
consistent with the 1940 Act and interpretations thereunder; (iii) 
stated that the Index and the Fund should be expected to perform 
significantly different from the inverse of the VIX (as defined 
herein); (iv) clarified where pricing information for the Shares and 
the underlying investments of the Fund will be publicly available; 
(v) represented that all statements and representations made in the 
filing regarding the Index composition, description of the portfolio 
or reference assets, limitations on portfolio holdings or reference 
assets, dissemination and availability of the Index, reference 
asset, and IIV (as defined herein), and the applicability of 
Exchange rules specified in the filing shall constitute continued 
listing requirements for the Fund; (vi) represented that the 
Exchange has a general policy prohibiting the distribution of 
material, non-public information by its employees; (vii) added 
additional information regarding the Information Circular to be 
distributed prior to the commencement of trading, including a 
discussion of suitability obligations by Members; (viii) discussed 
increased sales practice and customer margin requirements for FINRA 
members applicable to the Shares; (ix) represented that the Fund 
does not seek to achieve its primary investment objective over a 
period of time greater than a single day; and (x) made technical, 
clarifying, and conforming changes. Amendment No. 2 is available on 
the Commission's website at: https://www.sec.gov/comments/sr-cboebzx-2020-003/srcboebzx2020003-7098109-215773.pdf.
    \8\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposal, as Modified by Amendment No. 2 \9\
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    \9\ Additional information regarding the Fund, the Trust, and 
the Shares, including investment strategies, creation and redemption 
procedures, and portfolio holdings can be found in Amendment No. 2, 
supra note 7.
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A. Description of the Fund

    The Exchange proposes to list and trade Shares of the Fund \10\ 
under BZX Rule 14.11(f)(4), which governs the listing and trading of 
Trust Issued Receipts \11\ on the Exchange. Volatility Shares LLC 
(``Sponsor''), a Delaware limited liability company and a commodity 
pool operator, serves as the Sponsor of the Trust.\12\ Tidal ETF 
Services LLC serves as the administrator; U.S. Bank National 
Association serves as custodian of the Fund and the Shares; U.S. 
Bancorp Fund Services, LLC serves as the sub-administrator and transfer 
agent; and Wilmington Trust Company is the sole trustee of the Trust.
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    \10\ The Exchange states that the Fund has filed a draft 
registration statement on Form S-1 under the Securities Act of 1933, 
dated December 6, 2019 (File No. 377-02945) (``Draft Registration 
Statement''). The Exchange represents that the Fund will not trade 
on the Exchange until there is an effective registration statement 
for the Fund.
    \11\ Rule 14.11(f)(4) applies to Trust Issued Receipts that 
invest in ``Financial Instruments.'' The term ``Financial 
Instruments,'' as defined in Rule 14.11(f)(4)(A)(iv), 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.
    \12\ The Exchange states that the Sponsor is not a broker-dealer 
or affiliated with a broker-dealer. The Exchange further states that 
in the event that (a) the Sponsor becomes a broker-dealer or newly 
affiliated with a broker-dealer, or (b) any new sponsor is a broker-
dealer or becomes affiliated with a broker-dealer, it will implement 
and maintain a fire wall with respect to its relevant personnel or 
such broker-dealer affiliate, as applicable, regarding access to 
information concerning the composition and/or changes to the 
portfolio, and will be subject to procedures designed to prevent the 
use and dissemination of material non-public information regarding 
the portfolio.
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    The Exchange states that the Fund seeks to provide daily investment 
results (before fees and expenses) that correspond to the performance 
of the Short VIX Futures Index (SHORTVOL) (``Index'').\13\ The Index 
seeks to offer short exposure to market volatility through publicly 
traded futures markets and measures the daily inverse performance of a 
theoretical portfolio of first- and second-month futures contracts on 
the Cboe Volatility Index (``VIX'').\14\ The Fund does not seek to 
achieve its primary investment objective over a period of time greater 
than a single day. The return of the Fund for a period longer than a 
single day is the result of its return for each day compounded over the 
period and usually will differ in amount and possibly even direction 
from either the inverse of the VIX or the inverse of a portfolio of 
short-term VIX Futures Contracts for the same period. These differences 
can be significant.
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    \13\ The Index is sponsored by Cboe Global Indexes (``Index 
Sponsor''). The Index Sponsor is not a registered broker-dealer, but 
is affiliated with a broker-dealer. The Exchange represents that the 
Index Sponsor has implemented and will maintain a fire wall with 
respect to the broker-dealer affiliate regarding access to 
information concerning the composition of and/or changes to the 
Index. In addition, the Exchange represents that the Index Sponsor 
has implemented and will maintain procedures that are designed to 
prevent the use and dissemination of material, non-public 
information regarding the Index.
    \14\ The Exchange states that the VIX is designed to measure the 
implied volatility of the S&P 500 over 30 days in the future and is 
calculated based on the prices of certain put and call options on 
the S&P 500. The Exchange states that the VIX is reflective of the 
premium paid by investors for certain options linked to the level of 
the S&P 500.
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    The Fund will primarily invest in VIX futures contracts traded on 
the Cboe Futures Exchange, Inc. (``CFE'') (``VIX Futures Contracts'') 
based on components of the Index to pursue its investment objective. In 
the event accountability rules, price limits, position limits, margin 
limits or other exposure limits are reached with respect

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to VIX Futures Contracts, the Sponsor may cause the Fund to obtain 
exposure to the Index through over-the-counter (``OTC'') swaps 
referencing the Index or referencing particular VIX Futures Contracts 
comprising the Index (``VIX Swap Agreements'').
    The Fund may also invest in VIX Swap Agreements if the market for a 
specific VIX 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) or in situations where the Sponsor deems 
it impractical or inadvisable to buy or sell VIX Futures Contracts 
(such as during periods of market volatility or illiquidity). The VIX 
Swap Agreements in which the Fund may invest may or may not be 
cleared.\15\ The Fund will collateralize its obligations with Cash and 
Cash Equivalents \16\ consistent with the 1940 Act and interpretations 
thereunder.
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    \15\ The Exchange represents that the Fund will only enter into 
VIX Swap Agreements with counterparties that the Sponsor reasonably 
believes are capable of performing under the contract and will post 
collateral as required by the counterparty. The Fund will seek, 
where possible, to use counterparties, as applicable, whose 
financial status is such that the risk of default is reduced; 
however, the risk of losses resulting from default is still 
possible. The Sponsor will evaluate the creditworthiness of 
counterparties on a regular basis. In addition to information 
provided by credit agencies, the Sponsor will review approved 
counterparties using various factors, which may include the 
counterparty's reputation, the Sponsor's past experience with the 
counterparty and the price/market actions of debt of the 
counterparty. The Fund may use various techniques to minimize OTC 
counterparty credit risk including entering into arrangements with 
counterparties whereby both sides exchange collateral on a mark-to-
market basis. Collateral posted by the Fund to a counterparty in 
connection with uncleared VIX Swap Agreements is generally held for 
the benefit of the counterparty in a segregated tri-party account at 
the custodian to protect the counterparty against non-payment by the 
Fund.
    \16\ For purposes of the proposal, ``Cash and Cash Equivalents'' 
has the meaning set forth in BZX Rule 14.11(i)(4)(C)(iii) applicable 
to Managed Fund Shares.
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    In addition to VIX Swap Agreements, if the Fund is unable to meet 
its investment objective through investments in VIX Futures Contracts, 
the Fund may also obtain exposure to the Index through listed VIX 
options contracts traded on the Cboe Exchange, Inc. (``Cboe'') (``VIX 
Options Contracts'').
    The Fund may also invest in Cash and Cash Equivalents that may 
serve as collateral in the VIX Futures Contracts, VIX Swap Agreements, 
and VIX Options Contracts (collectively, ``VIX Derivative Products'').
    If the Fund is successful in meeting its objective, its value 
(before fees and expenses) on a given day should gain approximately as 
much on a percentage basis as the level of the Index when it rises. 
Conversely, its value (before fees and expenses) should lose 
approximately as much on a percentage basis as the level of the Index 
when it declines. The Fund primarily acquires short exposure to the VIX 
through VIX Futures Contracts, such that the Fund has exposure intended 
to approximate the Index at the time of the net asset value (``NAV'') 
calculation of the Fund.\17\ However, as discussed above, in the event 
that the Fund is unable to meet its investment objective solely through 
the investment of VIX Futures Contracts, it may invest in VIX Swap 
Agreements or VIX Options Contracts. The Fund may also invest in Cash 
or Cash Equivalents that may serve as collateral to the Fund's 
investments in VIX Derivative Products.
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    \17\ The Exchange states the Fund's NAV will be calculated at 
4:00 p.m. ET.
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    The Fund is not actively managed but rather seeks to remain fully 
invested in VIX Derivative Products (and Cash and Cash Equivalents as 
collateral) that provide exposure to the Index consistent with its 
investment objective without regard to market conditions, trends or 
direction. In seeking to achieve the Fund's investment objective, the 
Sponsor uses 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 Fund's 
objective. The Sponsor relies upon a pre-determined model to generate 
orders that result in repositioning the Fund's investments in 
accordance with its investment objective.

B. VIX Futures Contracts

    The Index is comprised of, and the value of the Fund will be based 
on, VIX Futures Contracts. VIX Futures Contracts are measures of the 
market's expectation of the level of VIX at certain points in the 
future, and as such, will behave differently than current, or spot, 
VIX. According to the Exchange, while the VIX represents a measure of 
the current expected volatility of the S&P 500 over the next 30 days, 
the prices of VIX Futures Contracts are based on the current 
expectation of what the expected 30-day volatility will be at a 
particular time in the future (on the expiration date). As a result, 
the Index and the Fund should be expected to perform very differently 
from the inverse of the VIX over all periods of time.

C. Description of the Index

    The Index is designed to express the daily inverse performance of a 
theoretical portfolio of first- and second-month VIX Futures Contracts 
(``Index Components''), with the price of each VIX Futures Contract 
reflecting the market's expectation of future volatility. The Index 
seeks to reflect the returns that are potentially available from 
holding an unleveraged short position in first- and second- month VIX 
Futures Contracts. While the Index does not correspond to the inverse 
of the VIX, as it seeks short exposure to VIX, the value of the Index, 
and by extension the Fund, will generally rise as the VIX falls and 
fall as the VIX rises. However, as noted above, because VIX Futures 
Contracts correlate to future volatility readings of VIX, while the VIX 
itself correlates to current volatility, the Index and the Fund should 
be expected to perform significantly different from the inverse of the 
VIX. Further, unlike the Index, the VIX, which is not a benchmark for 
the Fund, is calculated based on the prices of certain put and call 
options on the S&P 500.\18\
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    \18\ See supra note 14.
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    The Index employs rules for selecting the Index Components and a 
formula to calculate a level for the Index from the prices of these 
components. Specifically, the Index Components represent the prices of 
the two near-term VIX Futures Contracts, replicating a position that 
rolls the nearest month VIX Futures Contract to the next month VIX 
Futures Contract on a daily basis in equal fractional amounts. This 
results in a constant weighted average maturity of approximately one 
month. The roll period usually begins on the Wednesday falling 30 
calendar days before the S&P 500 option expiration for the following 
month (``Cboe VIX Monthly Futures Settlement Date'') and runs to the 
Tuesday prior to the subsequent month's Cboe VIX Monthly Futures 
Settlement Date.

III. Proceedings To Determine Whether to Approve or Disapprove SR-
CboeBZX-2020-003, as Modified by Amendment No. 2, and Grounds for 
Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \19\ to determine whether the proposed rule 
change, as modified by Amendment No. 2, 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 proposal. 
Institution of proceedings does not indicate that the

[[Page 23583]]

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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    \19\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\20\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposal'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.'' \21\
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    \20\ Id.
    \21\ 15 U.S.C. 78f(b)(5).
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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 proposed rule 
change, as modified by Amendment No. 2, 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.\22\
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    \22\ Section 19(b)(2) of the Exchange 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 proposed rule change, as modified by 
Amendment No. 2, should be approved or disapproved by May 19, 2020. Any 
person who wishes to file a rebuttal to any other person's submission 
must file that rebuttal by June 2, 2020.
    The Commission asks that commenters address the sufficiency of the 
Exchange's statements in support of the proposal, which are set forth 
in Amendment No. 2,\23\ in addition to any other comments they may wish 
to submit about the proposed rule change. In this regard, the 
Commission seeks commenters' views regarding whether the Exchange's 
proposal to list and trade Shares of the Fund, which seeks to provide 
daily investment results that correspond to the performance of an index 
that measures the daily inverse performance of a theoretical portfolio 
of first- and second-month VIX Futures Contracts, is adequately 
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, and is consistent with the 
maintenance of a fair and orderly market under the Exchange Act. In 
particular, the Commission seeks commenters' views regarding whether 
the Exchange has adequately described the potential impact of sudden 
fluctuations in market volatility on the Index and on the Fund's 
operation and performance for the Commission to make a determination 
under Section 6(b)(5) of the Act.
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    \23\ See supra note 7.
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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-CboeBZX-2020-003 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-CboeBZX-2020-003. 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-CboeBZX-2020-003 and should be submitted 
by May 19, 2020. Rebuttal comments should be submitted by June 2, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12); 17 CFR 200.30-3(a)(57).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-08937 Filed 4-27-20; 8:45 am]
 BILLING CODE 8011-01-P


