[Federal Register Volume 85, Number 198 (Tuesday, October 13, 2020)]
[Notices]
[Pages 64563-64565]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-22639]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90118; File No. SR-CboeBZX-2020-053]


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

October 7, 2020.

I. Introduction

    On June 23, 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 2x Long VIX Futures ETF 
(``Fund''), a Series of VS Trust

[[Page 64564]]

(``Trust''). On June 26, 2020, the Exchange filed Amendment No. 1 to 
the proposed rule change. The proposed rule change, as modified by 
Amendment No. 1, was published for comment in the Federal Register on 
July 10, 2020.\3\ On August 13, 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\ This order institutes proceedings pursuant to 
Section 19(b)(2)(B) of the Act \6\ to determine whether to approve or 
disapprove the proposed rule change, as modified by Amendment No. 1.
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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. 89234 (July 6, 
2020), 85 FR 41644 (``Notice''). Comments on the proposed rule 
change can be found at: https://www.sec.gov/comments/sr-cboebzx-2020-053/srcboebzx2020053.htm.
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 89545, 85 FR 51124 
(August 19, 2020). The Commission designated October 8, 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\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of and Comment on the Proposal \7\
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    \7\ Additional information regarding the Fund, the Trust, and 
the Shares can be found in the Notice, supra note 3.
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A. Description of the Proposal

    The Exchange proposes to list and trade the Shares pursuant to BZX 
Rule 14.11(f)(4), which governs the listing and trading of Trust Issued 
Receipts on the Exchange.
    Volatility Shares LLC (``Sponsor''), a Delaware limited liability 
company, is the sponsor of the Trust.\8\ The Sponsor is a commodity 
pool operator.\9\ Tidal ETF Services LLC serves as the administrator, 
and U.S. Bank National Association serves as custodian of the Fund and 
its Shares. U.S. Bancorp Fund Services, LLC is the sub-administrator 
and transfer agent. Wilmington Trust Company, a Delaware trust company, 
is the sole trustee of the Trust.
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    \8\ The Sponsor is not a broker-dealer or affiliated with a 
broker-dealer. 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.
    \9\ The Exchange represents that the Fund will file a 
registration statement on Form S-1 under the Securities Act of 1933, 
and that the Shares will not be listed on the Exchange until there 
is an effective registration statement for the Shares.
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    The Fund will seek to provide a return that is 200% of the return 
of its benchmark index for a single day. Therefore, if the Fund is 
successful in meeting its objective, its value (before fees and 
expenses) on a given day should gain approximately 200% of the return 
of its benchmark index for a single day; conversely, its value (before 
fees and expenses) should lose approximately 200% of the return of its 
benchmark index for a single day when it declines.
    The benchmark index seeks to offer long exposure to market 
volatility through publicly traded futures markets. The benchmark for 
the Fund is the Long VIX Futures Index (``Index''), ticker symbol 
LONGVOL,\10\ which measures the daily performance of a theoretical 
portfolio of first- and second-month futures contracts on the Cboe 
Volatility Index (``VIX'').\11\ The Index is comprised of, and the 
value of the Fund will be based on, VIX futures contracts traded on the 
Cboe Futures Exchange, Inc. (``VIX Futures Contracts'').\12\
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    \10\ 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 Index Sponsor has 
implemented and will maintain a fire wall with respect to the 
broker-dealer affiliate regarding access to information concerning 
the composition and/or changes to the Index. In addition, 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.
    \11\ The VIX is an index designed to measure the implied 
volatility of the S&P 500 over 30 days in the future. The VIX is 
calculated based on the prices of certain put and call options on 
the S&P 500. The VIX is reflective of the premium paid by investors 
for certain options linked to the level of the S&P 500.
    \12\ VIX Futures Contracts are measures of the market's 
expectation of the level of VIX at certain points in the future. 
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 on the contracts' expiration 
date.
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    The Fund would primarily invest in 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 to VIX Futures 
Contracts, the Sponsor might cause the Fund to obtain exposure to the 
Index through over-the-counter swaps referencing the Index or 
particular VIX Futures Contracts comprising the Index (``VIX Swap 
Agreements'').\13\ The VIX Swap Agreements in which the Fund may invest 
may be cleared or non-cleared.
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    \13\ 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).
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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. (``VIX Options 
Contracts'').
    The Fund may also invest in Cash and Cash Equivalents that may 
serve as collateral for the VIX Futures Contracts, VIX Swap Agreements, 
and VIX Options Contracts (collectively, the ``VIX Derivative 
Products'').\14\
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    \14\ ``Cash and Cash Equivalents'' means the instruments defined 
in BZX Rule 14.11(i)(4)(C)(iii).
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    The Fund would seek to remain fully invested at all times in VIX 
Derivative Products (as well as the Cash and Cash Equivalents that may 
serve as collateral) that provide exposure to the Index consistent with 
its investment objective without regard to market conditions, trends or 
direction. The Sponsor would rely upon a pre-determined model to 
reposition the Fund's investments in accordance with its investment 
objective.

B. Comment on the Proposal

    A commenter opposes the proposed rule change and states that 2x 
long volatility is not a profitable investment during bull markets. The 
commenter points to the predominantly negative annual returns of 
another exchange-traded product linked to long volatility, which the 
commenter characterizes as the predecessor to the Fund. The commenter 
also asserts that 2x long volatility does not make sense as a product, 
as volatility is already volatile.\15\
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    \15\ See letter dated July 10, 2020 from John Motson, available 
at: https://www.sec.gov/comments/sr-cboebzx-2020-053/srcboebzx2020053-7409699-219192.htm.
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III. Proceedings To Determine Whether To Approve or Disapprove SR-
CboeBZX-2020-053, as Modified by Amendment No. 1, and Grounds for 
Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \16\ to determine whether the proposed rule 
change, as modified by Amendment No. 1, should be approved or 
disapproved. Institution of such proceedings is appropriate at this 
time in view of the legal and policy

[[Page 64565]]

issues raised by the proposal. 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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    \16\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\17\ 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.'' \18\
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    \17\ Id.
    \18\ 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. 1, 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.\19\
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    \19\ 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 proposed rule change, as modified by 
Amendment No. 1, should be approved or disapproved by November 3, 2020. 
Any person who wishes to file a rebuttal to any other person's 
submission must file that rebuttal by November 17, 2020.
    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, 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 the Shares, which seek to provide daily investment 
results that correspond to 200% of the return of an index designed to 
measure the daily 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 Act. The Commission also 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. In particular, the 
Commission seeks comment regarding the Fund's operation during periods 
with large percentage increases in volatility, and the potential market 
impact of the Fund's daily rebalance.
    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-2020-053 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-2020-053. 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-2020-053 and should be submitted 
by November 3, 2020. Rebuttal comments should be submitted by November 
17, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(57).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-22639 Filed 10-9-20; 8:45 am]
BILLING CODE 8011-01-P


