[Federal Register Volume 79, Number 56 (Monday, March 24, 2014)]
[Notices]
[Pages 16073-16083]
[FR Doc No: 2014-06304]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71736; File No. SR-BATS-2014-007]

Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of
Filing of Proposed Rule Change To List and Trade Shares of Certain
Funds of the ProShares Trust

March 18, 2014.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on March 13, 2014, BATS Exchange, Inc. (the ``Exchange'' or
``BATS'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    The Exchange is proposing to list and trade shares of certain funds
(the ``Fund'' when discussed individually or, collectively, the
``Funds'') of the ProShares Trust (the ``Trust'') under BATS Rule
14.11(i) (``Managed Fund Shares''). The shares of the individual Funds
are referred to herein as the ``Shares.''
    The text of the proposed rule addition is available at the
Exchange's Web site at http://www.batstrading.com, at the principal
office of the Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
Sections A, B, and C below, of the most significant parts of such
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to list and trade the Shares under BATS Rule
14.11(i), which governs the listing and trading of Managed Fund Shares
on the Exchange.\3\ The Funds will be actively managed funds that seek
to provide exposure (or inverse exposure) to the credit of a segment of
the fixed income markets by selecting a broadly diversified, liquid
credit derivative portfolio. The Adviser (as defined below) intends to
obtain such credit exposure primarily via credit default swaps
(``CDS'') that are centrally cleared and index-based.\4\ ProFund
Advisors LLC, an affiliate of the Adviser, has for over eight years
managed mutual funds registered under the Investment Company Act of
1940 (the ``1940 Act'') that use both long and short unleveraged CDS
investments as a principal investment strategy.
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    \3\ The Commission approved BATS Rule 14.11(i) in Securities
Exchange Act Release No. 65225 (August 30, 2011), 76 FR 55148
(September 6, 2011) (SR-BATS-2011-018).
    \4\ CDS provide exposure to the credit of one or more debt
issuers referred to as ``reference entities.'' These instruments are
designed to reflect changes in credit quality, including events of
default. CDS are most commonly discussed in terms of buying or
selling credit protection with respect to a reference entity.
Selling credit protection is equivalent to being ``long'' credit.
Buying credit protection is equivalent to being ``short'' credit.
Index-based CDS provide credit exposure, through a single trade, to
a basket of reference entities. A variety of index-based CDS with
different characteristics are currently available in the marketplace
with new issuances occurring periodically. Issuances typically vary
in terms of underlying reference entities and maturity and, thus,
can have significant differences in performance over time.
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    The Exchange believes that these Funds can benefit investors by
providing the ability to hedge against declines, or profit from
improvement in, the general credit quality of the North American and
European investment grade and high yield debt markets. Short credit
exposure can be valuable to investors seeking to protect their bond
portfolios, particularly in periods of significant debt market stress
or in a credit crisis (via the ``Short'' Funds, set forth below). Long
credit exposure can be valuable for investors seeking to isolate
improving credit quality as a source of return (via the ``Long'' Funds,
set forth below). As investors increasingly seek to diversify, and at
times hedge their investments, the Funds will provide access to these
valuable tools with the protections of a 1940 Act mutual fund and the
liquidity and transparency of the exchange traded fund (``ETF'')
structure.
    The Funds are also structured to address common concerns regarding
counterparty risk and the use of leverage in CDS. To limit counterparty
risk (while bolstering liquidity), the Funds will utilize primarily
centrally cleared CDS contracts. The Funds may also invest, to a more
limited extent, in exchange-traded futures contracts linked to index-
based CDS (also known as ``credit index futures''), which are also
centrally cleared.\5\ In addition, the Funds will seek to obtain only
non-leveraged long or short credit exposure, as applicable (i.e.,
exposure equivalent to Fund assets). In contrast, many market
participants utilize CDS to obtain leveraged exposure to credit of
between 20x and 100x.
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    \5\ As a general matter, futures contracts are standardized
contracts traded on, or subject to the rules of, an exchange that
call for the future delivery of a specified quantity and type of
asset at a specified time and place or, alternatively, may call for
cash settlement. Credit index futures provide exposure to the credit
of a number of reference entities. Unlike CDS, certain credit index
futures do not provide protection against events of default.
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    The Shares will be offered by the Trust, which was established as a
Delaware statutory trust on May 29, 2002. The Trust is registered with
the Commission as an open-end investment company and has filed a
registration statement on behalf of the Funds on Form N-1A
(``Registration Statement'') with the Commission.\6\
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    \6\ See Registration Statement on Form N-1A for the Trust, dated
May 31, 2013 (File Nos. 333-89822 and 811-21114). The descriptions
of the Fund and the Shares contained herein are based, in part, on
information in the Registration Statement. The Commission has issued
an order granting certain exemptive relief to the Company under the
Investment Company Act of 1940 (15 U.S.C. 80a-1) (``1940 Act'') (the
``Exemptive Order''). See Investment Company Act Release No. 30562
(June 18, 2013) (File No. 812-14041).
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Description of the Shares and the Funds
    ProShare Advisors LLC is the investment adviser (``PSA'' or
``Adviser'') to the Funds. JPMorgan Chase Bank, National Association is
the administrator, custodian, fund account agent, index receipt agent
and transfer agent for the Trust. SEI Investments Distribution Co.
(``Distributor'') serves as the distributor for the Trust.
    BATS Rule 14.11(i)(7) provides that, if the investment adviser to
the investment company issuing Managed Fund Shares is affiliated with a
broker-dealer, such investment adviser shall erect a ``fire wall''
between the investment adviser and the broker-dealer with respect to
access to information concerning the composition and/or changes to such
investment

company portfolio.\7\ In addition, Rule 14.11(i)(7) further requires
that personnel who make decisions on the investment company's portfolio
composition must be subject to procedures designed to prevent the use
and dissemination of material nonpublic information regarding the
applicable investment company portfolio. Rule 14.11(i)(7) is similar to
BATS Rule 14.11(b)(5)(A)(i), however, Rule 14.11(i)(7) in connection
with the establishment of a ``fire wall'' between the investment
adviser and the broker-dealer reflects the applicable open-end fund's
portfolio, not an underlying benchmark index, as is the case with
index-based funds. The Adviser is not a registered broker-dealer, but
is currently affiliated with a broker-dealer and, in the future may be
affiliated with other broker dealers. The Adviser personnel who make
decisions regarding the Fund's [sic] portfolio are subject to
procedures designed to prevent the use and dissemination of material
nonpublic information regarding the Fund's [sic] portfolio. In the
event that (a) the Adviser becomes a broker-dealer or newly affiliated
with a broker-dealer, or (b) any new adviser or sub-adviser is a
broker-dealer or becomes affiliated with a broker-dealer, it will
implement 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 such portfolio.
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    \7\ An investment adviser to an open-end fund is required to be
registered under the Investment Advisers Act of 1940 (the ``Advisers
Act''). As a result, the Adviser and its related personnel are
subject to the provisions of Rule 204A-1 under the Advisers Act
relating to codes of ethics. This Rule requires investment advisers
to adopt a code of ethics that reflects the fiduciary nature of the
relationship to clients as well as compliance with other applicable
securities laws. Accordingly, procedures designed to prevent the
communication and misuse of non-public information by an investment
adviser must be consistent with Rule 204A-1 under the Advisers Act.
In addition, Rule 206(4)-7 under the Advisers Act makes it unlawful
for an investment adviser to provide investment advice to clients
unless such investment adviser has (i) adopted and implemented
written policies and procedures reasonably designed to prevent
violation, by the investment adviser and its supervised persons, of
the Advisers Act and the Commission rules adopted thereunder; (ii)
implemented, at a minimum, an annual review regarding the adequacy
of the policies and procedures established pursuant to subparagraph
(i) above and the effectiveness of their implementation; and (iii)
designated an individual (who is a supervised person) responsible
for administering the policies and procedures adopted under
subparagraph (i) above.
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ProShares CDS North American HY Credit ETF
    According to the Registration Statement, the Fund seeks to provide
long exposure to credit by investing primarily in a broadly
diversified, liquid portfolio of index-based CDS for which the
reference entities are North American high yield (i.e., below
investment grade or ``junk bond'') debt issuers. The Fund seeks to
increase in value when the North American high yield credit market
improves (i.e., the likelihood of payment by North American high yield
debt issuers increases), while also seeking to limit the impact of a
change in the credit quality of any single high yield debt issuer. To
achieve its objective, the Fund will invest, under normal
circumstances,\8\ at least 80% of its net assets in centrally cleared
index-based CDS. The Adviser will actively manage the Fund, selecting
credit derivatives based on the following primary considerations:
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    \8\ The term ``under normal circumstances'' includes, but is not
limited to, the absence of adverse market, economic, political, or
other conditions, including extreme volatility or trading halts in
the CDS markets, the related futures markets, or the financial
markets generally; operational issues causing dissemination of
inaccurate market information; or force majeure type events such as
systems failure, natural or man-made disaster, act of God, armed
conflict, act of terrorism, riot, or labor disruption, or any
similar intervening circumstance.
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     Diversification--maintaining broadly diversified exposure
to the credit of North American high yield debt issuers;
     Liquidity--favoring CDS with greater relative liquidity;
and
     Sensitivity to Changes in Credit Quality--generally
favoring credit derivatives having greater sensitivity to changes in
credit quality.

The Adviser may, at times, also consider other factors such as the
relative value of one credit derivative versus another.

    The Fund will seek to obtain long credit exposure equivalent to its
assets and will not provide leveraged exposure to credit. The Fund will
typically have exposure to individual sectors to the same extent as the
index-based instruments in which it invests.\9\
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    \9\ See Form N-1A, Item 9. The Commission has taken the position
that a fund is concentrated if it invests in more than 25% of the
value of its total assets in any one industry. See, e.g., Investment
Company Act Release No. 9011 (October 30, 1975), 40 FR 54241
(November 21, 1975).
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    The Fund intends to qualify each year as a regulated investment
company (a ``RIC'') under Subchapter M of the Internal Revenue Code of
1986, as amended.\10\ The Fund will invest its assets, and otherwise
conduct its operations, in a manner that is intended to satisfy the
qualifying income, diversification and distribution requirements
necessary to establish and maintain RIC qualification under Subchapter
M. The Fund will not invest in options or non-U.S. equity securities.
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    \10\ 26 U.S.C. 851.
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Credit Default Swaps (CDS)
    The Fund intends to primarily invest in centrally cleared, index-
based CDS. Like exchange-traded futures contracts, centrally cleared
swaps are cleared through a central clearinghouse and, as such, the
counterparty risk traditionally associated with over-the-counter swaps
is eliminated.\11\
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    \11\ As with exchange-traded futures contracts, holders of
centrally cleared swaps do have counterparty risk relative to their
Futures Commission Merchant (``FCM''). The Funds will select one or
more large, well-capitalized institutions to act as their FCM.
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    The Adviser intends to utilize CDS to sell credit protection, thus
obtaining long exposure to North American high yield credit. The Fund's
investments in CDS will be consistent with the Fund's investment
objective and will not be used to create leverage.
Other Portfolio Holdings
    In addition to the instruments described above, the Fund will
invest in money market instruments \12\ in a manner consistent with its
investment objective in order to generate additional return, to help
manage cash flows in and out of the Fund, such as in connection with
payment of dividends or expenses, to satisfy margin requirements, and
to provide collateral or to otherwise back investments in CDS and
futures contracts.
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    \12\ For each of the Funds, the specific money market
instruments are Treasury securities and repurchase agreements and,
in the future, may include money market fund shares.
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    The Fund may also invest in credit index futures in a manner
consistent with its investment objective to a limited extent to obtain
additional long credit exposure to North American high yield debt
issuers.
    The Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid assets (calculated at the time of investment) deemed
illiquid by the Adviser \13\ under the 1940 Act.\14\ The

Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether, in light of current circumstances, an adequate level
of liquidity is being maintained, and will consider taking appropriate
steps in order to maintain adequate liquidity if, through a change in
values, net assets, or other circumstances, more than 15% of the Fund's
net assets are held in illiquid assets. Illiquid assets include assets
subject to contractual or other restrictions on resale and other
instruments that lack readily available markets as determined in
accordance with Commission staff guidance.
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    \13\ In reaching liquidity decisions, the Adviser may consider
the following factors: the frequency of trades and quotes for the
security; the number of dealers wishing to purchase or sell the
security and the number of other potential purchasers; dealer
undertakings to make a market in the security; and the nature of the
security and the nature of the marketplace trades (e.g., the time
needed to dispose of the security, the method of soliciting offers,
and the mechanics of transfer).
    \14\ The Commission has stated that long-standing Commission
guidelines have required open-end funds to hold no more than 15% of
their net assets in illiquid securities and other illiquid assets.
See Investment Company Act Release No. 28193 (March 11, 2008), 73 FR
14618 (March 18, 2008), footnote 34. See also, Investment Company
Act Release No. 5847 (October 21, 1969), 35 FR 19989 (December 31,
1970) (Statement Regarding ``Restricted Securities''); Investment
Company Act Release No. 18612 (March 12, 1992), 57 FR 9828 (March
20, 1992) (Revisions of Guidelines to Form N-1A). A fund's portfolio
security is illiquid if it cannot be disposed of in the ordinary
course of business within seven days at approximately the value
ascribed to it by the fund. See Investment Company Act Release No.
14983 (March 12, 1986), 51 FR 9773 (March 21, 1986) (adopting
amendments to Rule 2a-7 under the 1940 Act); Investment Company Act
Release No. 17452 (April 23, 1990), 55 FR 17933 (April 30, 1990)
(adopting Rule 144A under the Securities Act of 1933).
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ProShares CDS Short North American HY Credit ETF
    According to the Registration Statement, the Fund seeks to provide
inverse exposure to credit by investing primarily in a broadly
diversified, liquid portfolio of index-based CDS for which the
reference entities are North American high yield (i.e., below
investment grade or ``junk bond'') debt issuers. The Fund seeks to
increase in value when the North American high yield credit market
declines (i.e., the likelihood of payment by North American high yield
debt issuers decreases), while also seeking to limit the impact of a
change in the credit quality of any single high yield debt issuer. To
achieve its objective, the Fund will invest, under normal
circumstances, at least 80% of its net assets in centrally cleared
index-based CDS. The Adviser will actively manage the Fund, selecting
credit derivatives based on the following primary considerations:
     Diversification--maintaining broadly diversified exposure
to the credit of North American high yield debt issuers;
     Liquidity--favoring CDS with greater relative liquidity;
and
     Sensitivity to Changes in Credit Quality--generally
favoring credit derivatives having greater sensitivity to changes in
credit quality.

The Adviser may, at times, also consider other factors such as the
relative value of one credit derivative versus another.

    The Fund will seek to obtain short credit exposure equivalent to
its assets and will not provide leveraged exposure to credit. The Fund
will typically have exposure to individual sectors to the same extent
as the index-based instruments in which it invests.\15\
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    \15\ See supra note 9.
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    The Fund intends to qualify each year as a RIC under Subchapter M
of the Internal Revenue Code of 1986, as amended.\16\ The Fund will
invest its assets, and otherwise conduct its operations, in a manner
that is intended to satisfy the qualifying income, diversification and
distribution requirements necessary to establish and maintain RIC
qualification under Subchapter M. The Fund will not invest in options
or non-U.S. equity securities.
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    \16\ See supra note 10.
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Credit Default Swaps
    The Fund intends to primarily invest in centrally cleared, index-
based CDS. Like exchange-traded futures contracts, centrally cleared
swaps are cleared through a central clearinghouse and, as such, the
counterparty risk traditionally associated with over-the-counter swaps
is eliminated.\17\
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    \17\ See supra note 11.
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    The Adviser intends to utilize CDS to buy credit protection, thus
obtaining inverse exposure to North American high yield credit. The
Fund's investments in CDS will be consistent with the Fund's investment
objective and will not be used to create leverage.
Other Portfolio Holdings
    In addition to the instruments described above, the Fund will
invest in money market instruments in a manner consistent with its
investment objective in order to generate additional returns, to help
manage cash flows in and out of the Fund, such as in connection with
payment of dividends or expenses, to satisfy margin requirements, and
to provide collateral or to otherwise back investments in CDS and
futures contracts.
    The Fund may also invest in credit index futures in a manner
consistent with its investment objective to a limited extent to obtain
additional inverse credit exposure to North American high yield debt
issuers.
    The Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid assets (calculated at the time of investment) deemed
illiquid by the Adviser under the 1940 Act. The Fund will monitor its
portfolio liquidity on an ongoing basis to determine whether, in light
of current circumstances, an adequate level of liquidity is being
maintained, and will consider taking appropriate steps in order to
maintain adequate liquidity if, through a change in values, net assets,
or other circumstances, more than 15% of the Fund's net assets are held
in illiquid assets. Illiquid assets include assets subject to
contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with
Commission staff guidance.
ProShares CDS North American IG Credit ETF
    According to the Registration Statement, the Fund seeks to provide
long exposure to credit by investing primarily in a broadly
diversified, liquid portfolio of index-based CDS for which the
reference entities are North American investment grade debt issuers.
The Fund seeks to increase in value when the North American investment
grade credit market improves (i.e., the likelihood of payment by North
American investment grade debt issuers increases), while also seeking
to limit the impact of a change in the credit quality of any single
investment grade debt issuer. To achieve its objective, the Fund will
invest, under normal circumstances, at least 80% of its net assets in
centrally cleared index-based CDS. The Adviser will actively manage the
Fund, selecting credit derivatives based on the following primary
considerations:
     Diversification--maintaining broadly diversified exposure
to the credit of North American investment grade debt issuers;
     Liquidity--favoring CDS with greater relative liquidity;
and
     Sensitivity to Changes in Credit Quality--generally
favoring credit derivatives having greater sensitivity to changes in
credit quality.

The Adviser may, at times, also consider other factors such as the
relative value of one credit derivative versus another.
    The Fund will seek to obtain long credit exposure equivalent to its
assets and will not provide leveraged exposure to credit. The Fund will
typically have exposure to individual sectors to the same extent as the
index-based instruments in which it invests.\18\
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    \18\ See supra note 9.
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    The Fund intends to qualify each year as a RIC under Subchapter M
of the Internal Revenue Code of 1986, as

amended.\19\ The Fund will invest its assets, and otherwise conduct its
operations, in a manner that is intended to satisfy the qualifying
income, diversification and distribution requirements necessary to
establish and maintain RIC qualification under Subchapter M. The Fund
will not invest in options or non-U.S. equity securities.
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    \19\ See supra note 10.
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Credit Default Swaps
    The Fund intends to primarily invest in centrally cleared, index-
based CDS. Like exchange-traded futures contracts, centrally cleared
swaps are cleared through a central clearinghouse and, as such, the
counterparty risk traditionally associated with over-the-counter swaps
is eliminated.\20\
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    \20\ See supra note 11.
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    The Adviser intends to utilize CDS to sell credit protection, thus
obtaining exposure to North American investment grade credit. The
Fund's investments in CDS will be consistent with the Fund's investment
objective and will not be used to create leverage.
Other Portfolio Holdings
    In addition to the instruments described above, the Fund will
invest in money market instruments in a manner consistent with its
investment objective in order to generate additional return, to help
manage cash flows in and out of the Fund, such as in connection with
payment of dividends or expenses, to satisfy margin requirements, and
to provide collateral or to otherwise back investments in CDS and
futures contracts.
    The Fund may also invest in credit index futures in a manner
consistent with its investment objective to a limited extent to obtain
additional long credit exposure to North American investment grade debt
issuers.
    The Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid assets (calculated at the time of investment) deemed
illiquid by the Adviser under the 1940 Act. The Fund will monitor its
portfolio liquidity on an ongoing basis to determine whether, in light
of current circumstances, an adequate level of liquidity is being
maintained, and will consider taking appropriate steps in order to
maintain adequate liquidity if, through a change in values, net assets,
or other circumstances, more than 15% of the Fund's net assets are held
in illiquid assets. Illiquid assets include assets subject to
contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with
Commission staff guidance.
ProShares CDS Short North American IG Credit ETF
    According to the Registration Statement, the Fund seeks to provide
inverse exposure to credit by investing primarily in a broadly
diversified, liquid portfolio of index-based CDS for which the
reference entities are North American investment grade debt issuers.
The Fund seeks to increase in value when the North American investment
grade credit market declines (i.e., the likelihood of payment by North
American investment grade debt issuers decreases), while also seeking
to limit the impact of a change in the credit quality of any single
investment grade debt issuer. To achieve its objective, the Fund will
invest, under normal circumstances, at least 80% of its net assets in
centrally cleared index-based CDS. The Adviser will actively manage the
Fund, selecting credit derivatives based on the following primary
considerations:
     Diversification--maintaining broadly diversified exposure
to the credit of North American investment grade debt issuers;
     Liquidity--favoring CDS with greater relative liquidity;
and
     Sensitivity to Changes in Credit Quality--generally
favoring credit derivatives having greater sensitivity to changes in
credit quality.

The Adviser may, at times, also consider other factors such as the
relative value of one credit derivative versus another.

    The Fund will seek to obtain short credit exposure equivalent to
its assets and will not provide leveraged exposure to credit. The Fund
will typically have exposure to individual sectors to the same extent
as the index-based instruments in which it invests.\21\
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    \21\ See supra note 9.
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    The Fund intends to qualify each year as a RIC under Subchapter M
of the Internal Revenue Code of 1986, as amended.\22\ The Fund will
invest its assets, and otherwise conduct its operations, in a manner
that is intended to satisfy the qualifying income, diversification and
distribution requirements necessary to establish and maintain RIC
qualification under Subchapter M. The Fund will not invest in options
or non-U.S. equity securities.
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    \22\ See supra note 10.
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Credit Default Swaps
    The Fund intends to primarily invest in centrally cleared, index-
based CDS. Like exchange-traded futures contracts, centrally cleared
swaps are cleared through a central clearinghouse and, as such, the
counterparty risk traditionally associated with over-the-counter swaps
is eliminated.\23\
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    \23\ See supra note 11.
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    The Adviser intends to utilize CDS to buy credit protection, thus
obtaining inverse exposure to North American investment grade credit.
The Fund's investments in CDS will be consistent with the Fund's
investment objective and will not be used to create leverage.
Other Portfolio Holdings
    In addition to the instruments described above, the Fund will
invest in money market instruments in a manner consistent with its
investment objective in order to generate additional return, to help
manage cash flows in and out of the Fund, such as in connection with
payment of dividends or expenses, to satisfy margin requirements, and
to provide collateral or to otherwise back investments in CDS and
futures contracts.
    The Fund may also invest in credit index futures in a manner
consistent with its investment objective to a limited extent to obtain
additional inverse credit exposure to North American investment grade
debt issuers.
    The Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid assets (calculated at the time of investment) deemed
illiquid by the Adviser under the 1940 Act. The Fund will monitor its
portfolio liquidity on an ongoing basis to determine whether, in light
of current circumstances, an adequate level of liquidity is being
maintained, and will consider taking appropriate steps in order to
maintain adequate liquidity if, through a change in values, net assets,
or other circumstances, more than 15% of the Fund's net assets are held
in illiquid assets. Illiquid assets include assets subject to
contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with
Commission staff guidance.
ProShares CDS European HY Credit ETF
    According to the Registration Statement, the Fund seeks to provide
long exposure to credit by investing primarily in a broadly
diversified, liquid portfolio of index-based CDS for which the
reference entities are European high-yield (i.e., below investment
grade or ``junk bond'') debt issuers. The Fund seeks to increase in
value when the European high yield credit market improves (i.e., the
likelihood of payment by European high yield debt issuers increases),
while also seeking to

limit the impact of a change in the credit quality of any single high
yield debt issuer. To achieve its objective, the Fund will invest,
under normal circumstances, at least 80% of its net assets in centrally
cleared index-based CDS. The Adviser will actively manage the Fund,
selecting credit derivatives based on the following primary
considerations:
     Diversification--maintaining broadly diversified exposure
to the credit of European high yield debt issuers;
     Liquidity--favoring CDS with greater relative liquidity;
and
     Sensitivity to Changes in Credit Quality--generally
favoring credit derivatives having greater sensitivity to changes in
credit quality.

The Adviser may, at times, also consider other factors such as the
relative value of one credit derivative versus another.

    The Fund will seek to obtain long credit exposure equivalent to its
assets and will not provide leveraged exposure to credit. The Fund will
typically have exposure to individual sectors to the same extent as the
index-based instruments in which it invests.\24\
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    \24\ See supra note 9.
---------------------------------------------------------------------------

    The Fund intends to qualify each year as a RIC under Subchapter M
of the Internal Revenue Code of 1986, as amended.\25\ The Fund will
invest its assets, and otherwise conduct its operations, in a manner
that is intended to satisfy the qualifying income, diversification and
distribution requirements necessary to establish and maintain RIC
qualification under Subchapter M. The Fund will not invest in options
or non-U.S. equity securities.
---------------------------------------------------------------------------

    \25\ See supra note 10.
---------------------------------------------------------------------------

Credit Default Swaps
    The Fund intends to primarily invest in centrally cleared, index-
based CDS. Like exchange-traded futures contracts, centrally cleared
swaps are cleared through a central clearinghouse and, as such, the
counterparty risk traditionally associated with over-the-counter swaps
is eliminated.\26\ The Adviser intends to utilize CDS to sell credit
protection, thus obtaining exposure to European high yield credit. The
Fund's investments in CDS will be consistent with the Fund's investment
objective and will not be used to create leverage.
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    \26\ See supra note 11.
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Other Portfolio Holdings
    In addition to the instruments described above, the Fund will
invest in money market instruments in a manner consistent with its
investment objective in order to generate additional return, to help
manage cash flows in and out of the Fund, such as in connection with
payment of dividends or expenses, to satisfy margin requirements, and
to provide collateral or to otherwise back investments in CDS and
futures contracts.
    The Fund may also invest in credit index futures in a manner
consistent with its investment objective to a limited extent to obtain
additional long credit exposure to European high yield debt issuers.
    The Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid assets (calculated at the time of investment) deemed
illiquid by the Adviser under the 1940 Act. The Fund will monitor its
portfolio liquidity on an ongoing basis to determine whether, in light
of current circumstances, an adequate level of liquidity is being
maintained, and will consider taking appropriate steps in order to
maintain adequate liquidity if, through a change in values, net assets,
or other circumstances, more than 15% of the Fund's net assets are held
in illiquid assets. Illiquid assets include assets subject to
contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with
Commission staff guidance.
ProShares CDS Short European HY Credit ETF
    According to the Registration Statement, the Fund seeks to provide
inverse exposure to credit by investing primarily in a broadly
diversified, liquid portfolio of index-based CDS for which the
reference entities are European high yield (i.e., below investment
grade or ``junk bond'') debt issuers. The Fund seeks to increase in
value when the European high yield credit market declines (i.e., the
likelihood of payment by European high yield debt issuers decreases),
while also seeking to limit the impact of a change in the credit
quality of any single high yield debt issuer. To achieve its objective,
the Fund will invest, under normal circumstances, at least 80% of its
net assets in centrally cleared index-based CDS. The Adviser will
actively manage the Fund, selecting credit derivatives based on the
following primary considerations:
     Diversification--maintaining broadly diversified exposure
to the credit of European high yield debt issuers;
     Liquidity--favoring CDS with greater relative liquidity;
and
     Sensitivity to Changes in Credit Quality--generally
favoring credit derivatives having greater sensitivity to changes in
credit quality.

The Adviser may, at times, also consider other factors such as the
relative value of one credit derivative versus another.

    The Fund will seek to obtain short credit exposure equivalent to
its assets and will not provide leveraged exposure to credit. The Fund
will typically have exposure to individual sectors to the same extent
as the index-based instruments in which it invests.\27\
---------------------------------------------------------------------------

    \27\ See supra note 9.
---------------------------------------------------------------------------

    The Fund intends to qualify each year as a RIC under Subchapter M
of the Internal Revenue Code of 1986, as amended.\28\ The Fund will
invest its assets, and otherwise conduct its operations, in a manner
that is intended to satisfy the qualifying income, diversification and
distribution requirements necessary to establish and maintain RIC
qualification under Subchapter M. The Fund will not invest in options
or non-U.S. equity securities.
---------------------------------------------------------------------------

    \28\ See supra note 10.
---------------------------------------------------------------------------

Credit Default Swaps
    The Fund intends to primarily invest in centrally cleared, index-
based CDS. Like exchange-traded futures contracts, centrally cleared
swaps are cleared through a central clearinghouse and, as such, the
counterparty risk traditionally associated with over-the-counter swaps
is eliminated.\29\
---------------------------------------------------------------------------

    \29\ See supra note 11.
---------------------------------------------------------------------------

    The Adviser intends to utilize CDS to buy credit protection, thus
obtaining inverse exposure to European high yield credit. The Fund's
investments in CDS will be consistent with the Fund's investment
objective and will not be used to create leverage.
Other Portfolio Holdings
    In addition to the instruments described above, the Fund will
invest in money market instruments in a manner consistent with its
investment objective in order to generate additional return, to help
manage cash flows in and out of the Fund, such as in connection with
payment of dividends or expenses, to satisfy margin requirements, and
to provide collateral or to otherwise back investments in CDS and
futures contracts.
    The Fund may also invest in credit index futures in a manner
consistent with its investment objective to a limited extent to obtain
additional inverse credit exposure to European high yield debt issuers.
    The Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid assets (calculated at the time of investment) deemed
illiquid by the

Adviser under the 1940 Act. The Fund will monitor its portfolio
liquidity on an ongoing basis to determine whether, in light of current
circumstances, an adequate level of liquidity is being maintained, and
will consider taking appropriate steps in order to maintain adequate
liquidity if, through a change in values, net assets, or other
circumstances, more than 15% of the Fund's net assets are held in
illiquid assets. Illiquid assets include assets subject to contractual
or other restrictions on resale and other instruments that lack readily
available markets as determined in accordance with Commission staff
guidance.
ProShares CDS European IG Credit ETF
    According to the Registration Statement, the Fund seeks to provide
long exposure to credit by investing primarily in a broadly
diversified, liquid portfolio of index-based CDS for which the
reference entities are European investment grade debt issuers. The Fund
seeks to increase in value when the European investment grade credit
market improves (i.e., the likelihood of payment by European investment
grade debt issuers increases), while also seeking to limit the impact
of a change in the credit quality of any single investment grade debt
issuer. To achieve its objective, the Fund will invest, under normal
circumstances, at least 80% of its net assets in centrally cleared
index-based CDS. The Adviser will actively manage the Fund, selecting
credit derivatives based on the following primary considerations:
     Diversification--maintaining broadly diversified exposure
to the credit of European investment grade debt issuers;
     Liquidity--favoring CDS with greater relative liquidity;
and
     Sensitivity to Changes in Credit Quality--generally
favoring credit derivatives having greater sensitivity to changes in
credit quality.

The Adviser may, at times, also consider other factors such as the
relative value of one credit derivative versus another.

    The Fund will seek to obtain long credit exposure equivalent to its
assets and will not provide leveraged exposure to credit. The Fund will
typically have exposure to individual sectors to the same extent as the
index-based instruments in which it invests.\30\
---------------------------------------------------------------------------

    \30\ See supra note 9.
---------------------------------------------------------------------------

    The Fund intends to qualify each year as a RIC under Subchapter M
of the Internal Revenue Code of 1986, as amended.\31\ The Fund will
invest its assets, and otherwise conduct its operations, in a manner
that is intended to satisfy the qualifying income, diversification and
distribution requirements necessary to establish and maintain RIC
qualification under Subchapter M. The Fund will not invest in options
or non-U.S. equity securities.
---------------------------------------------------------------------------

    \31\ See supra note 10.
---------------------------------------------------------------------------

Credit Default Swaps
    The Fund intends to primarily invest in centrally cleared, index-
based CDS. Like exchange-traded futures contracts, centrally cleared
swaps are cleared through a central clearinghouse and, as such, the
counterparty risk traditionally associated with over-the-counter swaps
is eliminated.\32\
---------------------------------------------------------------------------

    \32\ See supra note 11.
---------------------------------------------------------------------------

    The Adviser intends to utilize CDS to sell credit protection, thus
obtaining long exposure to European investment grade credit. The Fund's
investments in CDS will be consistent with the Fund's investment
objective and will not be used to create leverage.
Other Portfolio Holdings
    In addition to the instruments described above, the Fund will
invest in money market instruments in a manner consistent with its
investment objective in order to generate additional return, to help
manage cash flows in and out of the Fund, such as in connection with
payment of dividends or expenses, to satisfy margin requirements, and
to provide collateral or to otherwise back investments in CDS and
futures contracts.
    The Fund may also invest in credit index futures in a manner
consistent with its investment objective to a limited extent to obtain
additional long credit exposure to European investment grade debt
issuers.
    The Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid assets (calculated at the time of investment) deemed
illiquid by the Adviser under the 1940 Act. The Fund will monitor its
portfolio liquidity on an ongoing basis to determine whether, in light
of current circumstances, an adequate level of liquidity is being
maintained, and will consider taking appropriate steps in order to
maintain adequate liquidity if, through a change in values, net assets,
or other circumstances, more than 15% of the Fund's net assets are held
in illiquid assets. Illiquid assets include assets subject to
contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with
Commission staff guidance.
ProShares CDS Short European IG Credit ETF
    According to the Registration Statement, the Fund seeks to provide
inverse exposure to credit by investing primarily in a broadly
diversified, liquid portfolio of index-based CDS and for which the
reference entities are European investment grade debt issuers. The Fund
seeks to increase in value when the European investment grade credit
market declines (i.e., the likelihood of payment by European investment
grade debt issuers decreases), while also seeking to limit the impact
of a change in the credit quality of any single investment grade debt
issuer. To achieve its objective, the Fund will invest, under normal
circumstances, at least 80% of its net assets in centrally cleared
index-based CDS. The Adviser will actively manage the Fund, selecting
credit derivatives based on the following primary considerations:
     Diversification--maintaining broadly diversified exposure
to the credit of European investment grade debt issuers;
     Liquidity--favoring CDS with greater relative liquidity;
and
     Sensitivity to Changes in Credit Quality--generally
favoring credit derivatives having greater sensitivity to changes in
credit quality.

The Adviser may, at times, also consider other factors such as the
relative value of one credit derivative versus another.

    The Fund will seek to obtain short credit exposure equivalent to
its assets and will not provide leveraged exposure to credit. The Fund
will typically have exposure to individual sectors to the same extent
as the index-based instruments in which it invests.\33\
---------------------------------------------------------------------------

    \33\ See supra note 9.
---------------------------------------------------------------------------

    The Fund intends to qualify each year as a RIC under Subchapter M
of the Internal Revenue Code of 1986, as amended.\34\ The Fund will
invest its assets, and otherwise conduct its operations, in a manner
that is intended to satisfy the qualifying income, diversification and
distribution requirements necessary to establish and maintain RIC
qualification under Subchapter M. The Fund will not invest in options
or non-U.S. equity securities.
---------------------------------------------------------------------------

    \34\ See supra note 10.
---------------------------------------------------------------------------

Credit Default Swaps
    The Fund intends to primarily invest in centrally cleared, index-
based CDS. Like exchange-traded futures contracts, centrally cleared
swaps are cleared through a central clearinghouse and, as such, the
counterparty risk traditionally

associated with over-the-counter swaps is eliminated.\35\
---------------------------------------------------------------------------

    \35\ See supra note 11.
---------------------------------------------------------------------------

    The Adviser intends to utilize CDS to buy credit protection, thus
obtaining inverse exposure to European investment grade credit. The
Fund's investments in CDS will be consistent with the Fund's investment
objective and will not be used to create leverage.
Other Portfolio Holdings
    In addition to the instruments described above, the Fund will
invest in money market instruments in a manner consistent with its
investment objective in order to generate additional return, to help
manage cash flows in and out of the Fund, such as in connection with
payment of dividends or expenses, to satisfy margin requirements, and
to provide collateral or to otherwise back investments in CDS and
futures contracts.
    The Fund may also invest in credit index futures in a manner
consistent with its investment objective to a limited extent to obtain
additional inverse credit exposure to European investment grade debt
issuers.
    The Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid assets (calculated at the time of investment) deemed
illiquid by the Adviser under the 1940 Act. The Fund will monitor its
portfolio liquidity on an ongoing basis to determine whether, in light
of current circumstances, an adequate level of liquidity is being
maintained, and will consider taking appropriate steps in order to
maintain adequate liquidity if, through a change in values, net assets,
or other circumstances, more than 15% of the Fund's net assets are held
in illiquid assets. Illiquid assets include assets subject to
contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with
Commission staff guidance.
Net Asset Value
    According to the Registration Statement, the net asset value
(``NAV'') of the Shares of the Funds will be calculated by dividing the
value of the net assets of such Fund (i.e., the value of its total
assets less total liabilities) by the total number of Shares
outstanding, rounded to the nearest cent. Expenses and fees, including
the management and administration fees, are accrued daily and taken
into account for purposes of determining NAV. The NAV of the CDS North
American HY Credit ETF, the CDS Short North American HY Credit ETF, the
CDS North American IG Credit ETF, and the CDS Short North American IG
Credit ETF (together, the ``North American Funds'') are generally
determined at 3:00 p.m. Eastern Time each business day when the BATS
Exchange is open for trading. The NAV of the CDS European HY Credit
ETF, the CDS Short European HY Credit ETF, the CDS European IG Credit
ETF, and the CDS Short European IG Credit ETF (together, the ``European
Funds'') are generally determined at 11:00 a.m. Eastern Time (or such
time as equals 4:00 p.m. London Time) on each business day that the
BATS Exchange is open. If the BATS Exchange or market on which the
[sic] Fund's investments are primarily traded closes early, the NAV may
be calculated prior to its normal calculation time. Creation/redemption
transaction order time cutoffs (as further described below) would also
be accelerated.
    To the extent that the reference entities underlying the CDS and
related futures contracts trade in foreign markets on days when a Fund
is not open for business, the value of the Fund's assets may vary and
shareholders may not be able to purchase or sell Fund Shares and
Authorized Participants may not be able to create or redeem Creation
Units.
    Securities and other assets are generally valued at their market
price using information provided by a pricing service or market
quotations. Certain short-term securities are valued on the basis of
amortized cost. CDS are generally valued on the basis of market prices,
generally the midpoint between the bid/ask quotes, obtained from a
third-party pricing service as of the time a Fund calculates its NAV.
Futures contracts, such as the credit index futures, are generally
valued at their last sale price prior to the time at which the NAV per
share of a class of shares of a Fund is determined. Of the money market
instruments held by the Funds, repurchase agreements are generally
valued at cost. U.S government securities are generally priced at a
quoted market price from an active market, generally the midpoint
between the bid/ask quotes. For U.S. government securities that mature
within sixty days, amortized cost may be used to approximate fair
value. Money market funds would generally be valued at their current
Net Asset Value per share, typically $1.00 per share. Alternatively,
fair valuation procedures as described below may be applied if deemed
more appropriate. Routine valuation of certain other derivatives is
performed using procedures approved by the Board of Trustees.
    When the Adviser determines that the price of a security or
derivative is not readily available or deems the price unreliable, it
may, in good faith, establish a fair value for that security or
derivative in accordance with procedures established by and under the
general supervision and responsibility of the Trust's Board of
Trustees. The use of a fair valuation method may be appropriate if, for
example, market quotations do not accurately reflect fair value for an
investment, a trading halt closes an exchange or market early, or other
events result in an exchange or market delaying its normal close. The
Adviser may consider applying appropriate valuation methodologies,
which may include discounts of market value of similar freely traded
securities, yields to maturity, or any other appropriate method. In
determining the appropriate methodology, the Adviser may consider all
relevant factors, including, among other things: Fundamental analytical
data; the types of securities affected; pricing history of the
security; whether dealer quotations are available; liquidity of the
market; news or other events; and other factors the Adviser deems
relevant.
    For more information regarding the valuation of Fund investments in
calculating the Fund's NAV, see the Registration Statement.
The Shares
    The Funds will issue and redeem Shares on a continuous basis at the
NAV per Share only in large blocks of a specified number of Shares or
multiples thereof (``Creation Units'') in transactions with authorized
participants who have entered into agreements with the Distributor. The
Adviser currently anticipates that a Creation Unit will consist of
50,000 Shares, though this number may change from time to time,
including prior to listing of the Shares. The exact number of Shares
that will constitute a Creation Unit will be disclosed in the
Registration Statement. Once created, Shares of the Funds trade on the
secondary market in amounts less than a Creation Unit.
    Although the Adviser anticipates that purchases and redemptions for
Creation Units will generally be executed on an all-cash basis, the
consideration for purchase of Creation Units of the Funds may consist
of an in-kind deposit of a designated portfolio of securities
(including any portion of such assets for which cash may be
substituted) (i.e., the ``Deposit Assets''), and the ``Cash Component''
computed as described below. Together, the Deposit Assets and the Cash
Component constitute the

``Fund Deposit,'' which represents the minimum initial and subsequent
investment amount for a Creation Unit of the Funds. The specific terms
surrounding the creation and redemption of shares are at the discretion
of the Adviser.
    The Deposit Assets and Fund Securities (as defined below), as the
case may be, in connection with a purchase or redemption of a Creation
Unit, generally will correspond pro rata, to the extent practicable, to
the assets held by the Funds.
    The Cash Component will be an amount equal to the difference
between the NAV of the Shares (per Creation Unit) and the ``Deposit
Amount,'' which will be an amount equal to the market value of the
Deposit Assets, and serve to compensate for any differences between the
NAV per Creation Unit and the Deposit Amount. The Funds generally offer
Creation Units partially or entirely for cash. PSA will make available
through the National Securities Clearing Corporation (``NSCC'') on each
business day, prior to the opening of business on the Exchange, the
list of names and the required number or par value of each Deposit
Security [sic] and the amount of the Cash Component to be included in
the current Fund Deposit (based on information as of the end of the
previous business day) for the Funds.
    The identity and number or par value of the Deposit Assets may
change pursuant to changes in the composition of the Funds' portfolio
as rebalancing adjustments and corporate action events occur from time
to time. The composition of the Deposit Assets may also change in
response to adjustments to the weighting or composition of the holdings
of the Funds.
    The Funds reserve the right to permit or require the substitution
of a ``cash in lieu'' amount to be added to the Cash Component to
replace any Deposit Security [sic] that may not be available in
sufficient quantity for delivery or that may not be eligible for
transfer through the Depository Trust Company (``DTC'') or the clearing
process through the NSCC.
    Except as noted below, all creation orders must be placed for one
or more Creation Units and must be received by the Distributor at a
time specified by the Adviser. Currently, such orders must be received
in proper form no later than 2:30 p.m. Eastern Time for the North
American Funds or 10:30 a.m. Eastern Time (or such time as equals 3:30
p.m. London Time) for the European Funds, in each case on the date such
order is placed in order for creation of Creation Units to be effected
based on the NAV of Shares of the Funds as next determined on such date
after receipt of the order in proper form. The ``Settlement Date'' is
generally the third business day after the transmittal date. On days
when the Exchange or the bond markets close earlier than normal, the
Funds may require orders to create or to redeem Creation Units to be
placed earlier in the day.
    Fund Deposits must be delivered through either the Continuous Net
Settlement facility of the NSCC, the Federal Reserve System (for cash
and government securities), through DTC (for corporate and municipal
securities), or through a central depository account, such as with
Euroclear or DTC, maintained by State Street or a sub-custodian (a
``Central Depository Account''), in any case at the discretion of the
Adviser, by an authorized participant. Any portion of a Fund Deposit
that may not be delivered through the NSCC, Federal Reserve System or
DTC must be delivered through a Central Depository Account.
    A standard creation transaction fee may be imposed to offset the
transfer and other transaction costs associated with the issuance of
Creation Units.
    Shares of the Funds may be redeemed only in Creation Units at their
NAV next determined after receipt of a redemption request in proper
form by the Distributor and only on a business day. PSA will make
available through the NSCC, prior to the opening of business on the
Exchange on each business day, the designated portfolio of securities
(including any portion of such securities for which cash may be
substituted) that will be applicable (subject to possible amendment or
correction) to redemption requests received in proper form on that day
(``Fund Securities''). The redemption proceeds for a Creation Unit
generally will consist of a specified amount of cash less a redemption
transaction fee. The Funds generally will redeem Creation Units
entirely for cash.
    A standard redemption transaction fee may be imposed to offset
transfer and other transaction costs that may be incurred by the Fund.
    Redemption requests for Creation Units of the Funds must be
submitted to the Distributor by or through an authorized participant by
a time specified by the Adviser. Currently, such requests must be
received no later than 2:30 p.m. Eastern Time on any business day, in
order to receive that day's NAV (for the North American Funds) or 10:30
a.m. Eastern Time (or such time as equals 3:30 p.m. London Time) for
the European Funds. The authorized participant must transmit the
request for redemption in the form required by the Funds to the
Distributor in accordance with procedures set forth in the authorized
participant agreement.
    Additional information regarding the Shares and the Funds,
including investment strategies, risks, creation and redemption
procedures, fees and expenses, portfolio holdings disclosure policies,
distributions, taxes and reports to be distributed to beneficial owners
of the Shares can be found in the Registration Statement or on the Web
site for the Funds (www.ProShares.com), as applicable.
Availability of Information
    The Funds' Web sites, which will be publicly available prior to the
public offering of Shares, will include a form of the prospectus for
the Funds that may be downloaded. The Web sites will include additional
quantitative information updated on a daily basis, including, for the
Funds: (1) The prior business day's reported NAV, the closing market
price or the midpoint of the bid/ask spread at the time of calculation
of such NAV (the ``Bid/Ask price''),\36\ daily trading volume, and a
calculation of the premium and discount of the closing market price or
Bid/Ask Price against the NAV; and (2) data in chart format displaying
the frequency distribution of discounts and premiums of the daily
closing price against the NAV, within appropriate ranges, for each of
the four previous calendar quarters. Daily trading volume information
will be available in the financial section of newspapers, through
subscription services such as Bloomberg, Thomson Reuters, and
International Data Corporation, which can be accessed by authorized
participants and other investors, as well as through other electronic
services, including major public Web sites. On each business day,
before commencement of trading in Shares during Regular Trading Hours
\37\ on the Exchange, the Funds will disclose on their Web sites the
identities and quantities of the portfolio of CDS, futures, and other
assets (the ``Disclosed Portfolio'') held by the Funds that will form
the basis for the Funds' calculation of NAV at the end of the business
day.\38\

The Disclosed Portfolio will include, as applicable, the names
(including the credit derivative series or contract), quantity,
exposure value (notional value + gains/losses), and market value of
CDS, futures, and other assets held by the Funds and the
characteristics of such assets. The Web sites and information will be
publicly available at no charge.
---------------------------------------------------------------------------

    \36\ The Bid/Ask Price of the Funds will be determined using the
midpoint of the highest bid and the lowest offer on the Exchange as
of the time of calculation of the Funds' NAV. The records relating
to Bid/Ask Prices will be retained by the Funds and their service
providers.
    \37\ Regular Trading Hours are 9:30 a.m. to 4:00 p.m. Eastern
Time.
    \38\ Under accounting procedures to be followed by the Funds,
trades made on the prior business day (``T'') will be booked and
reflected in NAV on the current business day (``T+1''). Accordingly,
the Funds will be able to disclose at the beginning of the business
day the portfolio that will form the basis for the NAV calculation
at the end of the business day.
---------------------------------------------------------------------------

    In addition, for the Funds, an estimated value, defined in BATS
Rule 14.11(i)(3)(C) as the ``Intraday Indicative Value,'' that reflects
an estimated intraday value of the individual Fund's portfolio, will be
disseminated. Moreover, the Intraday Indicative Value will be based
upon the current value for the components of the Disclosed Portfolio
and will be updated and widely disseminated by one or more major market
data vendors at least every 15 seconds during the Exchange's Regular
Trading Hours.\39\ In addition, the quotations of certain of the Funds'
holdings may not be updated during U.S. trading hours if such holdings
do not trade in the United States or if updated prices cannot be
ascertained.
---------------------------------------------------------------------------

    \39\ Currently, it is the Exchange's understanding that several
major market data vendors display and/or make widely available
Intraday Indicative Values published via the Consolidated Tape
Association (``CTA'') or other data feeds.
---------------------------------------------------------------------------

    The dissemination of the Intraday Indicative Value, together with
the Disclosed Portfolio, will allow investors to determine the value of
the underlying portfolio of the Funds on a daily basis and provide an
estimate of that value throughout the trading day.
    Intraday price quotations on CDS of the type held by the Funds, as
well as repurchase agreements and Treasury instruments, are available
from major broker-dealer firms and from third-parties, which may
provide prices free with a time delay, or ``live'' with a paid fee. For
futures contracts, such intraday information is available directly from
the applicable listing exchange. Intraday price information is also
available through subscription services, such as Bloomberg and Thomson
Reuters, which can be accessed by authorized participants and other
investors. Money market fund shares are not generally priced or quoted
on an intraday basis.
    Information regarding market price and volume of the Shares will be
continually available on a real-time basis throughout the day on
brokers' computer screens and other electronic services. The previous
day's closing price and trading volume information for the Shares will
be generally available daily in the print and online financial press.
Quotation and last sale information for the Shares will be available on
the facilities of the CTA.
Initial and Continued Listing
    The Shares will be subject to BATS Rule 14.11(i), which sets forth
the initial and continued listing criteria applicable to Managed Fund
Shares. The Exchange represents that, for initial and/or continued
listing, the Funds must be in compliance with Rule 10A-3 \40\ under the
Act. A minimum of 100,000 Shares for each Fund will be outstanding at
the commencement of trading on the Exchange. The Exchange will obtain a
representation from the issuer of the Shares that the NAV will be
calculated daily and that the NAV and the Disclosed Portfolio will be
made available to all market participants at the same time.
---------------------------------------------------------------------------

    \40\ See 17 CFR 240.10A-3.
---------------------------------------------------------------------------

Trading Halts
    With respect to trading halts, the Exchange may consider all
relevant factors in exercising its discretion to halt or suspend
trading in the Shares of any of the Funds. The Exchange will halt
trading in the Shares under the conditions specified in BATS Rule
11.18. Trading may be halted because of market conditions or for
reasons that, in the view of the Exchange, make trading in the Shares
inadvisable. These may include: (1) The extent to which trading is not
occurring in the CDS, futures, and/or the financial instruments
composing the Disclosed Portfolio of the Funds; or (2) whether other
unusual conditions or circumstances detrimental to the maintenance of a
fair and orderly market are present. Trading in the Shares also will be
subject to Rule 14.11(i)(4)(B)(iv), which sets forth circumstances
under which Shares of the Funds may be halted.
Trading Rules
    The Exchange deems the Shares to be equity securities, thus
rendering trading in the Shares subject to the Exchange's existing
rules governing the trading of equity securities. BATS will allow
trading in the Shares from 8:00 a.m. until 5:00 p.m. Eastern Time. The
Exchange has appropriate rules to facilitate transactions in the Shares
during all trading sessions. As provided in BATS Rule 11.11(a), the
minimum price variation for quoting and entry of orders in Managed Fund
Shares traded on the Exchange is $0.01, with the exception of
securities that are priced less than $1.00, for which the minimum price
variation for order entry is $0.0001.
Surveillance
    The Exchange believes that its surveillance procedures are adequate
to properly monitor the trading of the Shares on the Exchange during
all trading sessions and to deter and detect violations of Exchange
rules and the applicable federal securities laws. Trading of the Shares
through the Exchange will be subject to the Exchange's surveillance
procedures for derivative products, including Managed Fund Shares. The
Exchange may obtain information regarding trading in the Shares and the
underlying futures via the Intermarket Surveillance Group (``ISG'')
from other exchanges who are members or affiliates of the ISG or with
which the Exchange has entered into a comprehensive surveillance
sharing agreement.\41\ In addition, the Exchange is able to access, as
needed, trade information for certain fixed income instruments reported
to FINRA's Trade Reporting and Compliance Engine (``TRACE''). The
Exchange prohibits the distribution of material non-public information
by its employees.
---------------------------------------------------------------------------

    \41\ For a list of the current members and affiliate members of
ISG, see www.isgportal.com. The Exchange notes that not all
components of the Disclosed Portfolio for the Funds may trade on
markets that are members of ISG or with which the Exchange has in
place a comprehensive surveillance sharing agreement. The Exchange
also notes that all of the futures contracts in the Disclosed
Portfolio for the Funds will trade on markets that are a member of
ISG or with which the Exchange has in place a comprehensive
surveillance sharing agreement.
---------------------------------------------------------------------------

Information Circular
    Prior to the commencement of trading, the Exchange will inform its
members in an Information Circular of the special characteristics and
risks associated with trading the Shares. Specifically, the Information
Circular will discuss the following: (1) The procedures for purchases
and redemptions of Shares in Creation Units (and that Shares are not
individually redeemable); (2) BATS Rule 3.7, which imposes suitability
obligations on Exchange members with respect to recommending
transactions in the Shares to customers; (3) how information regarding
the Intraday Indicative Value is disseminated; (4) the risks involved
in trading the Shares during the Pre-Opening \42\ and After Hours
Trading Sessions \43\ when an updated Intraday Indicative Value will
not be calculated or publicly

disseminated; (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with
the confirmation of a transaction; and (6) trading information.
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    \42\ The Pre-Opening Session is from 8:00 a.m. to 9:30 a.m.
Eastern Time.
    \43\ The After Hours Trading Session is from 4:00 p.m. to 5:00
p.m. Eastern Time.
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    In addition, the Information Circular will advise members, prior to
the commencement of trading, of the prospectus delivery requirements
applicable to the Funds. Members purchasing Shares from the Funds for
resale to investors will deliver a prospectus to such investors. The
Information Circular will also discuss any exemptive, no-action, and
interpretive relief granted by the Commission from any rules under the
Act.
    In addition, the Information Circular will reference that the Funds
are subject to various fees and expenses described in the Registration
Statement. The Information Circular will also disclose the trading
hours of the Shares of the Funds and the applicable NAV calculation
time for the Shares. The Information Circular will disclose that
information about the Shares of the Funds will be publicly available on
the Funds' Web site. In addition, the Information Circular will
reference that the Trust is subject to various fees and expenses
described in the Registration Statement.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with Section
6(b) of the Act \44\ in general and Section 6(b)(5) of the Act \45\ in
particular in that it is designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in facilitating transactions in securities, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system and, in general, to protect investors and the
public interest.
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    \44\ 15 U.S.C. 78f.
    \45\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed rule change is designed to
prevent fraudulent and manipulative acts and practices in that the
Shares will be listed and traded on the Exchange pursuant to the
initial and continued listing criteria in BATS Rule 14.11(i). The
Exchange believes that its surveillance procedures are adequate to
properly monitor the trading of the Shares on the Exchange during all
trading sessions and to deter and detect violations of Exchange rules
and the applicable federal securities laws regarding trading in the
Shares and the underlying futures via the ISG from other exchanges who
are members or affiliates of the ISG or with which the Exchange has
entered into a comprehensive surveillance sharing agreement.\46\ In
addition, the Exchange is able to access, as needed, trade information
for certain fixed income instruments reported to FINRA's TRACE.
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    \46\ See note 41, supra.
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    According to the Registration Statement, each Fund expects that,
under normal circumstances, it will have at least 80% of its assets
invested in index-based North American or European CDS. The Funds may
also invest, to a limited extent, in credit index futures. In order to
limit counterparty risk, bolster liquidity, and increase price
transparency, all CDS utilized by the Funds will be centrally cleared
and all futures contracts will be exchange-traded. Each Fund will seek
to obtain long or short credit exposure equivalent to its assets and
will not provide leveraged exposure to credit. The Fund also may invest
its net assets in money market instruments in order to help manage cash
flows in and out of the Funds.
    Additionally, the Funds may individually hold up to an aggregate
amount of 15% of their net assets in illiquid assets (calculated at the
time of investment). The [sic] Fund will monitor its portfolio
liquidity on an ongoing basis to determine whether, in light of current
circumstances, an adequate level of liquidity is being maintained, and
will consider taking appropriate steps in order to maintain adequate
liquidity if, through a change in values, net assets, or other
circumstances, more than 15% of the Fund's net assets are held in
illiquid assets. Illiquid assets include assets subject to contractual
or other restrictions on resale and other instruments that lack readily
available markets as determined in accordance with Commission staff
guidance.
    The proposed rule change is designed to promote just and equitable
principles of trade and to protect investors and the public interest in
that the Exchange will obtain a representation from the issuer of the
Shares that the NAV will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants
at the same time. In addition, a large amount of information is
publicly available regarding the Fund and the Shares, thereby promoting
market transparency. Moreover, the Intraday Indicative Value will be
disseminated by one or more major market data vendors at least every 15
seconds during Regular Trading Hours. On each business day, before
commencement of trading in Shares during Regular Trading Hours, the
[sic] Fund will disclose on its Web site the Disclosed Portfolio that
will form the basis for the Fund's calculation of NAV at the end of the
business day. Pricing information will be available on the Funds' Web
sites including: (1) The prior business day's reported NAV, the Bid/Ask
Price of the Fund, and a calculation of the premium and discount of the
Bid/Ask Price against the NAV; and (2) data in chart format displaying
the frequency distribution of discounts and premiums of the daily Bid/
Ask Price against the NAV, within appropriate ranges, for each of the
four previous calendar quarters. Additionally, information regarding
market price and trading of the Shares will be continually available on
a real-time basis throughout the day on brokers' computer screens and
other electronic services, and quotation and last sale information for
the Shares will be available on the facilities of the CTA. The Web site
for the Funds will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative
information. Trading in Shares of the Funds will be halted under the
conditions specified in BATS Rule 11.18. Trading may also be halted
because of market conditions or for reasons that, in the view of the
Exchange, make trading in the Shares inadvisable. Finally, trading in
the Shares will be subject to BATS Rule 14.11(i)(4)(B)(iv), which sets
forth circumstances under which Shares of the Funds may be halted. In
addition, as noted above, investors will have ready access to
information regarding the Funds' holdings, the Intraday Indicative
Value, the Disclosed Portfolio, and quotation and last sale information
for the Shares.
    Intraday price quotations on CDS of the type held by the Funds, as
well as repurchase agreements and Treasury instruments are available
from major broker-dealer firms. Such intraday price information is also
available through subscription services, such as Bloomberg and Thomson
Reuters, which can be accessed by authorized participants and other
investors. Money market fund shares are not generally priced or quoted
on an intraday basis.
    The proposed rule change is designed to perfect the mechanism of a
free and open market and, in general, to protect investors and the
public interest in that it will facilitate the listing and trading of
additional types of actively-managed

exchange-traded product that will enhance competition among market
participants, to the benefit of investors and the marketplace. As noted
above, the Exchange has in place surveillance procedures relating to
trading in the Shares and may obtain information via ISG from other
exchanges that are members of ISG or with which the Exchange has
entered into a comprehensive surveillance sharing agreement as well as
trade information for certain fixed income instruments as reported to
FINRA's TRACE. In addition, as noted above, investors will have ready
access to information regarding the [sic] Fund's holdings, the Intraday
Indicative Value, the Disclosed Portfolio, and quotation and last sale
information for the Shares.
    For the above reasons, the Exchange believes that the proposed rule
change is consistent with the requirements of Section 6(b)(5) of the
Act.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purpose of the Act. The Exchange notes that the
proposed rule change will facilitate the listing and trading of
additional actively-managed exchange-traded products that will enhance
competition among market participants, to the benefit of investors and
the marketplace.

C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others

    The Exchange has neither solicited nor received written comments on
the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

    Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will:
    (A) by order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. 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_ADDRESS>Please include
File Number SR-BATS-2014-007 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-BATS-2014-007. 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 Web site (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 Web site 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 such filing also will be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-BATS-2014-007 and should be
submitted on or before April 14, 2014.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\47\
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    \47\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-06304 Filed 3-21-14; 8:45 am]
BILLING CODE 8011-01-P