[Federal Register Volume 79, Number 10 (Wednesday, January 15, 2014)]
[Notices]
[Pages 2705-2715]
[FR Doc No: 2014-00605]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71266; File No. SR-NYSEArca-2013-144]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Proposed Rule Change Relating To Listing and Trading of Shares of
the ETSpreads HY Long Credit Fund, the ETSpreads HY Short Credit Fund,
the ETSpreads IG Long Credit Fund and the ETSpreads IG Short Credit
Fund Under NYSE Arca Equities Rule 8.600

January 9, 2014.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that, on December 27, 2013, NYSE Arca, Inc. (the ``Exchange'' or
``NYSE Arca'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I and II
below, which Items have been prepared by the self-regulatory
organization. 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\ 15 U.S.C. 78a.
    \3\ 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 proposes to list and trade shares of the following
under NYSE Arca Equities Rule 8.600 (``Managed Fund Shares''): the
ETSpreads HY Long Credit Fund, the ETSpreads HY Short Credit Fund, the
ETSpreads IG Long Credit Fund and the ETSpreads IG Short Credit Fund.
The text of the proposed rule change is available on the Exchange's Web
site at www.nyse.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 self-regulatory organization
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 those 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 the
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to list and trade shares (``Shares'') of the
following under NYSE Arca Equities Rule 8.600 which governs the listing
and trading of Managed Fund Shares \4\: the ETSpreads HY Long Credit
Fund, the ETSpreads HY Short Credit Fund, the ETSpreads IG Long Credit
Fund and the ETSpreads IG Short Credit Fund (each, a ``Fund'' and
collectively, the ``Funds'').\5\ The Shares

will be offered by Exchange Traded Spreads Trust (the ``Trust''), a
statutory trust organized under the laws of the State of Delaware and
registered with the Commission as an open-end management investment
company.\6\ ETSpreads, LLC (the ``Adviser'') is the investment adviser
for each Fund and is registered as an ``investment adviser'' under the
Investment Advisers Act of 1940 (the ``Advisers Act'').\7\ ALPS
Distributors, Inc. (the ``Distributor'') will serve as the principal
underwriter and distributor for each Fund. The Distributor is a broker-
dealer registered under the Act and is not affiliated with the Adviser.
Commentary .06 to Rule 8.600 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.\8\ In addition,
Commentary .06 further requires that personnel who make decisions on
the open-end fund's portfolio composition must be subject to procedures
designed to prevent the use and dissemination of material nonpublic
information regarding the open-end fund's portfolio. The Adviser is not
registered as a broker-dealer but is affiliated with a broker-dealer
and has implemented a ``fire wall'' with respect to such broker-dealer
regarding access to information concerning the composition and/or
changes to the Funds' portfolios. If the Adviser elects to hire a sub-
adviser for the Funds that is also affiliated with a broker-dealer,
such sub-adviser will implement a fire wall with respect to such
broker-dealer regarding access to information concerning the
composition and/or changes to the portfolios. In the event (a) the
Adviser becomes newly affiliated with a broker-dealer, or (b) any new
adviser or sub-adviser is a registered broker-dealer or becomes
affiliated with a broker-dealer, it will implement a fire wall with
respect to its relevant personnel or its broker-dealer affiliate
regarding access to information concerning the composition and/or
changes to a 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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    \4\ A Managed Fund Share is a security that represents an
interest in an investment company registered under the Investment
Company Act of 1940 (15 U.S.C. 80a-1) (``1940 Act'') organized as an
open-end investment company or similar entity that invests in a
portfolio of securities selected by its investment adviser
consistent with its investment objectives and policies. In contrast,
an open-end investment company that issues Investment Company Units,
listed and traded on the Exchange under NYSE Arca Equities Rule
5.2(j)(3), seeks to provide investment results that correspond
generally to the price and yield performance of a specific foreign
or domestic stock index, fixed income securities index or
combination thereof.
    \5\ The Commission previously approved listing and trading on
the Exchange of actively managed funds under Rule 8.600. See
Securities Exchange Act Release Nos. 57801 (May 8, 2008), 73 FR
27878 (May 14, 2008) (SR-NYSEArca-2008-31) (order approving Exchange
listing and trading of twelve actively-managed funds of the
WisdomTree Trust); 61365 (January 15, 2010), 75 FR 4124 (January 26,
2010) (SR-NYSEArca-2009-114) (order approving listing and trading of
Grail McDonnell Fixed Income ETFs); 60981 (November 10, 2009), 74 FR
59594 (November 18, 2009) (SR-NYSEArca-2009-79) (order approving
listing and trading of five fixed income funds of the PIMCO ETF
Trust); 63329 (November 17, 2010), 75 FR 71760 (November 24, 2010)
(SR-NYSEArca-2010-86) (order approving listing and trading of
Peritus High Yield ETF).
    \6\ The Trust is registered under the 1940 Act. On April 9,
2013, the Trust filed with the Commission an amendment to the
registration statement for the Funds on Form N-1A under the
Securities Act of 1933 (15 U.S.C. 77a), and under the 1940 Act
relating to the Funds (File Nos. 333-148886 and 811-22177)
(``Registration Statement''). The Trust filed an Amended and
Restated Application for an Order under Section 6(c) of the 1940 Act
for exemptions from various provisions of the 1940 Act and rules
thereunder (File No. 812-13486), dated January 9, 2013 (``Exemptive
Application''). The Commission has issued an order granting certain
exemptive relief to the Trust under the 1940 Act. See Investment
Company Act Release No. 30378 (February 5, 2013) (``Exemptive
Order''). Investments made by the Funds will comply with the
conditions set forth in the Exemptive Order.
    \7\ 15 U.S.C. 80b-1.
    \8\ An investment adviser to an open-end fund is required to be
registered under 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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Description of the Funds
    According to the Registration Statement and as described below,
each Fund will seek to provide exposure to a long or short position
with respect to a specific segment of the North American corporate
credit markets.\9\ The strategy of each of the Funds involves buying
and selling credit default swaps (``CDS'') to outperform, before fees
and expenses, either a long or short position tied to its benchmark
index. Currently, each Fund will use either the Markit CDX North
American Investment Grade 5-year Total Return Index or the Markit CDX
North American High Yield 5-year Total Return Index (each an ``Index''
or a ``CDX Index'' and together the ``Indices'') as its benchmark. A
``CDX Index'' is an index comprised of multiple CDS with different
``Reference Entities'' (as described below), all of which have equal
weighting in the index. The Markit CDX North American Investment Grade
5-year Total Return Index is designed to track the credit quality of
125 investment grade North American debt issuers or the unsubordinated
debt obligations of such debt issuers. The Markit CDX North American
High Yield 5-year Total Return Index is designed to track the credit
quality of 100 high yield North American debt issuers or the
unsubordinated debt obligations of such debt issuers. None of the Funds
will use leverage and each Fund will maintain sufficient assets at all
times so that it can meet its payment, margin or other obligations
without borrowing. In general, no leverage means that, for each $100
million of assets under management, the relevant Fund will be a net
buyer or seller (consistent with its investment objective) of
protection on $100 million. While actual percentages will vary, it is
generally expected that less than twenty percent of a Fund's assets
will be in CDS and non-principal investments (as described below), and
the balance of a Fund's assets will be U.S. Treasury securities, money
market instruments and cash.
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    \9\ With respect to a particular credit market, a ``long
position'' means that an investor expects that the issuers of debt
securities in a particular debt market will be able to meet their
obligations in accordance with the terms of such debt securities in
full and on-time. With respect to a particular credit market, a
``short position'' means that an investor expects there will be an
increased likelihood that the issuers of debt securities in a
particular debt market will not be able to meet their obligations in
accordance with the terms of such debt securities in full or on-
time.
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    To meet its respective investment objective, under normal market
conditions,\10\ each Fund intends to invest substantially all of its
assets in (i) CDS that are cleared by a clearing organization and which
are either (a) CDS index swaps, including swaps based on the CDX Index,
(``CDX Index swaps''), based on multiple CDS relating to the debt
issued by different Reference Entities,\11\ or (b) ``Single Name CDS''
(as described below), which are CDS that relate only to the debt issued
by a single

Reference Entity \12\; (ii) futures contracts \13\ based on CDS or
other similar futures contracts; and (iii) obligations of, or those
guaranteed by, the United States government with a maturity of less
than six years (``U.S. Treasury securities''), money market
instruments, and cash.
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    \10\ The term ``under normal market conditions'' includes, but
is not limited to, the absence of extreme volatility or trading
halts in the fixed income markets or the financial markets
generally; events or circumstances causing a disruption in market
liquidity or orderly markets; 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.
    \11\ A ``Reference Entity'' is the entity whose debt underlies a
Single Name CDS (as described below) and can be a corporation,
government or other legal entity that issues debt of any kind. CDX
Index swaps are based on a particular index that includes Single
Name CDS of several Reference Entities.
    \12\ The Adviser represents that Fund transactions in CDS
cleared through a clearing organization that have been designated by
the Commodity Futures Trading Commission (``CFTC'') or the
Commission as ``made available to trade'' will be executed on
exchanges or on a swap execution facility subject to CFTC and/or
Commission oversight or regulation.
    \13\ The Funds intend to invest only in futures contracts traded
on exchanges that are subject to CFTC and/or Commission oversight or
regulation.
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General Description of Swaps
    A Fund will enter into swap agreements to invest in a specific
segment of the U.S. corporate credit market without owning or taking
physical custody of the underlying debt securities or other interests.
The initial counterparty to any CDS will typically be a bank,
investment banking firm or broker-dealer. If the CDS is cleared, the
swap with the initial counterparty will be replaced with a swap with
the clearing house.
    Swap agreements typically are settled on a net basis, which means
that the two payment streams are netted out, with a Fund receiving or
paying, as the case may be, only the net amount of the two payments.
Payments may be made at the conclusion of a swap agreement or
periodically during its term.
    Swap agreements do not involve the delivery of securities or other
underlying assets. Accordingly, the risk of loss with respect to swap
agreements is limited to the net amount of payments that a Fund is
contractually obligated to make. If a swap counterparty defaults, a
Fund's risk of loss consists of the net amount of payments the Fund is
contractually entitled to receive, if any. The net amount of the
excess, if any, of a Fund's obligations over its entitlements with
respect to each equity swap will be accrued on a daily basis, and an
amount of cash or liquid assets having an aggregate net asset value
(``NAV'') at least equal to such accrued excess will be maintained in a
segregated account by the Fund's custodian, The Bank of New York
Mellon.
    According to the Registration Statement, the CDS market has grown
substantially in recent years with a large number of banks and
investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the CDS market
has become relatively liquid in comparison with the markets for other
swaps which are traded in the over-the-counter (``OTC'') market, based
upon the number of transactions and notional value.\14\ According to
data published on The Depository Trust & Clearing Corporation
(``DTCC'') Trade Information Warehouse Web site, over 2 million CDS
contracts (including both single-name and multi-name products) have
open positions.\15\ Recent data provided to the CFTC indicates daily
transaction volumes of over 1500 transactions in CDS based on the
family of CDX Indices.\16\ Overall, the CDS marketplace has almost $29
trillion in notional dollar amount outstanding across both single and
multi-name products.\17\ CDS on standardized indices (including the CDX
Indices) accounts for about $10 trillion of the global OTC market in
notional dollar amount outstanding.\18\ CDS market risk transaction
activity, as measured by notional amount traded, increased 15% in the
2013 period versus the 2012 period.\19\ Growth in notional volumes and
trade counts related to new market transaction activity was driven by
an increase in CDS index trading.\20\ The Adviser, under the
supervision of the Trust's Board of Trustees, is responsible for
determining and monitoring the liquidity of Fund transactions in swap
agreements.
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    \14\ See 2013 ISDA Operations Benchmarking Survey, April 25,
2013, at p. 4 (available at http://www2.isda.org/functional-areas/research/surveys/operations-benchmarking-surveys/).
    \15\ See DTCC Trade Information Warehouse credit derivatives
data for the week ending 11-29-2013 (available at http://www.dtcc.com/products/derivserv/data_table_i.php).
    \16\ See ``Clearing Requirement Determination Under Section 2(h)
of the CEA'', 77 FR 74284, 74294 (December 13, 2012).
    \17\ Id. See also, Bank for International Settlements survey on
statistics on the OTC derivatives market as of November 7, 2013
(also available at http://www.bis.org/statistics/otcder/dt1920a.pdf).
    \18\ Id.
    \19\ Based on market risk transaction activity (as measured by
the volume of trading (using both transaction counts and notional
amounts traded)) from the DTCC Trade Information Warehouse for the
periods of February through July in 2011, 2012, and 2013. See CDS
Market Summary: Market Risk Transaction Activity--ISDA Research
Notes, October 2013 (available at http://www2.isda.org/attachment/NTk0MQ==/CDS%20Research%20Note%20final%202013-10-01.pdf).
    \20\ Id.
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    The use of swap agreements, including credit default swaps, is a
highly specialized activity which involves investment techniques and
risks different from those associated with ordinary portfolio
securities transactions. If a counterparty's creditworthiness declines,
the value of the swap would likely decline. Moreover, there is no
guarantee that a Fund could eliminate its exposure under an outstanding
swap agreement by entering into an offsetting swap agreement with the
same or another party.
    To reduce the credit risk that arises in connection with
investments in non-cleared swaps (as discussed below), each of the
Funds will generally enter into an agreement with each counterparty
based on a Master Agreement published by the International Swaps and
Derivatives Association, Inc. (``ISDA'') that provides for the netting
of its overall exposure to its counterparty. The Adviser will assess or
review, as appropriate, the creditworthiness of each potential or
existing counterparty to an OTC contract pursuant to guidelines
approved by the Adviser. Furthermore, the Adviser on behalf of the
Funds will only enter into OTC contracts with counterparties who are,
or are affiliates of, (a) banks regulated by a United States federal
bank regulator, (b) swap dealers or securities based swap dealers
regulated by the CFTC and/or the Commission, (c) broker-dealers
regulated by the Commission, or (d) insurance companies domiciled in
the United States. Existing counterparties will be reviewed
periodically by the Adviser. The Funds also may require that the
counterparty be highly rated and/or provide collateral or other credit
support.
Single Name CDS
    According to the Registration Statement, Single Name CDS are
instruments that allow the buyer to purchase protection against a
credit event such as a default on debt repayment obligations for a
specific Reference Entity and a seller to guarantee protection against
such event for the same entity. Because market perceptions about the
risk of default, or another credit event, change over time, the prices
of Single Name CDS for any given day are likely to change value. Bond
prices also change in value over time and some of this change is due to
changes in the strength of the underlying credit of the issuer. CDX
Index swaps are created in order to provide exposure to the
creditworthiness of a pre-designed market segment of the credit markets
such as the investment grade debt market or the high yield debt market.
    In addition, in the event of a credit event under a CDS, including
a CDS underlying the CDX Indices, the CDS would typically be cash
settled via auction conducted under protocols published by ISDA,
although physical settlement (i.e., an actual loan/bond

trade) is possible. Generally, the amount of the cash settlement is the
difference between the market value of the Reference Entity debt
obligation referred to in the CDS and the face value of the debt
obligation, and that amount is payable by the protection seller to the
protection buyer. The Funds intend to use cash settlement only and the
Single Name CDS underlying the CDX Indices will be required to be cash
settled.
    Ownership of a CDS can be transferred with the consent of the other
party to the swap, or in the case of a cleared swap, the customer's
futures commission merchant (``FCM'') to and in accordance with the
relevant clearing organization regulations. There is a well-developed
market for transfer of CDS, particularly cleared swaps, to third
parties with the consent of the original parties to the swap (such
transfers which require all parties' consent are commonly known as a
novation). Obtaining such consent is not guaranteed and may result in a
payment above the market value of the swap. Under such circumstances,
the Adviser generally expects that it will enter into an offsetting
cleared CDS to reduce or eliminate cleared swap positions rather than
seek the consent of its counterparty for a transfer or early
termination of a swap at a non-market price. The Adviser may unwind
non-cleared CDS through termination or transfer of its position with a
particular counterparty rather than enter into an offsetting trade with
a second counterparty in order to avoid incurring additional credit
exposure to the second counterparty and to avoid the possibility that
values of the respective positions will differ, although it may enter
into an offsetting transaction if the Adviser believes such a
transaction is in the best interest of Fund shareholders. Each Fund
will reduce the risk that it will be unable to close out a futures
contract by only entering into futures contracts that are traded on a
national futures exchange regulated by the CFTC.
    CDS are entered into among banks, securities firms, hedge funds,
corporations, insurance companies, mutual funds, pension funds, and
other institutional investors.\21\ CDS pricing is widely available to
market participants in the equity and fixed income markets via Markit,
Credit Market Analysis Ltd. (``CMA'') and Bloomberg L.P.
(``Bloomberg''). Daily trading volume of cleared swaps transacted via
the ICE Clear Credit LLC \22\ and CME Clearing \23\ clearing
organizations is available through their respective Web sites. The
Trust represents that, to its knowledge, no comprehensive information
on weekly trading volume for non-cleared CDS is available, although
ISDA does compile information about this market on an annual basis.\24\
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    \21\ The Adviser represents that the major dealer participants
in the CDS/CDX Index swap market are: Bank of America; Barclays; BNP
Paribas; Citibank; Credit Suisse; Deutsche Bank; Goldman Sachs;
HSBC; JPMorgan; Morgan Stanley; Nomura; UBS; and Wells Fargo.
    \22\ ICE Clear Credit LLC is a subsidiary of the
IntercontinentalExchange, Inc. (``ICE''). ICE Clear Credit LLC is
registered with the CFTC as a clearing house for credit default
swaps, including CDX Index swaps.
    \23\ CME Clearing is a division of Chicago Mercantile Exchange
Inc. (``CME''), which is a subsidiary of the CME Group Inc. CME is
registered with the CFTC as a clearing house for credit default
swaps, including CDX Index swaps.
    \24\ Source: ISDA Market Surveys (http://www2.isda.org/functional-areas/research/surveys/market-surveys/).
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Margin and Collateral
    Cleared CDS are subject to initial and variation margin
requirements set by the clearing organization that are based on mark-
to-market prices and other factors.\25\ In addition to this protection,
additional initial margin may also be required by an FCM to address its
credit exposure as guarantor to the clearing organization of the Funds'
positions at the clearing organization throughout the life of the swap
or futures contract.
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    \25\ The Funds intend to use ICE Clear Credit and CME Clearing
as the clearing organizations for their cleared CDS. According to
ICE Clear Credit, it employs a stress-based, five-factor methodology
to determine the initial margin requirements. The main elements of
the methodology are (i) liquidity and concentration requirements,
(ii) basis risk requirements, (iii) jump-to-default requirements,
(iv) risk factor spread response requirements, and (v) interest rate
and recovery rate sensitivity requirements. According to CME
Clearing, it determines initial margin requirements using a
methodology that addresses six risk factors including overall risk
of credit market, portfolio risk, idiosyncratic risk, and liquidity
risk. Currently, ICE Clear Credit and CME Clearing determine margin
on a net basis on a daily basis.
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    Subsequent to the payment of initial margin, variation margin is
either payable by or returned to the Funds on a daily basis, based on
the change in the value of the swap positions and the degree to which
the Funds are in or out of the money with respect to their positions.
The purpose of this is to minimize the credit exposure to the FCM and
the clearing organization. If the Funds fail to post margin, the
clearing organization can liquidate the Funds' positions. As such, the
counterparty exposure is limited to the change in value since the last
margin posted.
    In the case of non-cleared swaps, the 1940 Act requires that margin
equal to the market value of the swap be posted and held by the Funds'
custodian, The Bank of New York Mellon, on a daily basis. As with
variation margin for cleared swaps, margin would be payable by or
returned to the Funds based on the change in the value of the swap
positions and the degree to which the Funds are in or out of the money
with respect to their positions.
    Collateral or margin required to be provided for either cleared or
non-cleared CDS will generally represent a small portion of such swap's
aggregate notional value, and, accordingly, each Fund will generally
invest the balance of its assets in obligations of the U.S. government,
cash or cash equivalent assets. These assets will be available to
satisfy subsequent margin calls on the Fund, as well as available for
redemptions of Fund Shares and to pay its coupon or other payment
obligations under its CDS.\26\
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    \26\ In addition to its margin payments to the protection
seller, a protection buyer is required to pay an amount equal to the
value of the CDS on the date acquired and thereafter must pay
periodic fixed coupon payments determined by the clearing
organization, in the case of cleared CDS, or as agreed to with its
counterparties for non-cleared CDS.
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Principal Investments of the Funds
ETSpreads IG Long Credit Fund
    According to the Registration Statement, the investment objective
of the Fund is to provide long exposure to the credit of a diversified
portfolio of North American investment grade debt issuers. With respect
to a particular credit market, a ``long position'' means that an
investor expects that the issuers of debt securities in a particular
debt market will be able to meet their obligations in accordance with
the terms of such debt securities in full and on-time. The Fund will
invest, under normal market conditions, substantially all of its assets
in (i) CDS cleared by a clearing organization which are either (a) CDS
index swaps based on multiple CDS relating to the debt issued by
different Reference Entities, or (b) Single Name CDS based on CDS
relating to the debt issued by a single Reference Entity; (ii) futures
contracts based on CDS or other similar futures contracts; and (iii)
U.S. Treasury securities, money market instruments, and cash. In order
to gain exposure to the investment grade credit market, the Fund will
normally be a net protection seller under its CDS, and will be required
to make payments to the protection buyer when a specified adverse
credit event occurs relating to a Reference Entity.
    If the Fund is successful in meeting its objective, its NAV should
generally increase when the North American investment grade credit
market is improving. Conversely, its NAV should

generally decrease when the North American investment grade credit
market is deteriorating.
ETSpreads IG Short Credit Fund
    According to the Registration Statement, the investment objective
of the Fund is to provide short exposure to the credit of a diversified
portfolio of North American investment grade debt issuers. With respect
to a particular credit market, a ``short position'' means that an
investor expects there will be an increased likelihood that the issuers
of debt securities in a particular debt market will not be able to meet
their obligations in accordance with the terms of such debt securities
in full or on-time. The Fund will invest, under normal market
conditions, substantially all of its assets in (i) CDS cleared by a
clearing organization which are either (a) CDS index swaps based on
multiple CDS relating to the debt issued by different Reference
Entities, or (b) Single Name CDS based on CDS relating to the debt
issued by a single Reference Entity; (ii) futures contracts based on
CDS or other similar futures contracts; and (iii) U.S. Treasury
securities, money market instruments, and cash. In order to gain short
exposure to the investment grade credit market, the Fund will normally
be a net protection buyer under its CDS, and therefore will be required
to make the ongoing payments specified under such contracts that
represent the cost of purchasing protection from adverse credit events
relating to a Reference Entity.
    If the Fund is successful in meeting its objective, its NAV should
generally decrease as the North American investment grade credit market
is improving. Conversely, its NAV should generally increase as the
North American investment grade credit market is deteriorating.
ETSpreads HY Long Credit Fund
    According to the Registration Statement, the investment objective
of the Fund is to provide long exposure to the credit (i.e., the
likelihood that a borrower performs its payment obligations) of a
diversified portfolio of North American high yield debt issuers. With
respect to a particular credit market, a ``long position'' means that
an investor expects that the issuers of debt securities in a particular
debt market will be able to meet their obligations in accordance with
the terms of such debt securities in full and on-time. The Fund will
invest, under normal market conditions, substantially all of its assets
in (i) CDS cleared by a clearing organization which are either (a) CDS
index swaps based on multiple CDS relating to the debt issued by
different Reference Entities, or (b) Single Name CDS based on CDS
relating to the debt issued by a single Reference Entity; (ii) futures
contracts based on CDS or other similar futures contracts; and (iii)
U.S. Treasury securities, money market instruments, and cash. In order
to gain exposure to the high yield credit market, the Fund will
normally be a net protection seller under its CDS, i.e., it will be
required to make payments to the protection buyer when a specified
adverse credit event occurs relating to a Reference Entity.
    If the Fund is successful in meeting its objective, its NAV should
generally increase when the North American high yield credit market is
rallying, which means that credit quality is improving and differences
or ``spreads'' between the returns on high yield debt securities
generally and the returns on debt securities with comparable maturities
that are essentially free of credit risk (such as U.S. Treasury
securities) are decreasing or ``tightening.'' Conversely, its NAV
should generally decrease when the North American high yield credit
market is falling (going down), credit quality is deteriorating, and
spreads are increasing or ``widening.''
ETSpreads HY Short Credit Fund
    According to the Registration Statement, the investment objective
of the Fund is to provide short exposure to the credit of a diversified
portfolio of North American high yield debt issuers. With respect to a
particular credit market, a ``short position'' means that an investor
expects there will be an increased likelihood that the issuers of debt
securities in a particular debt market will not be able to meet their
obligations in accordance with the terms of such debt securities in
full or on-time. The Fund will invest, under normal market conditions,
substantially all of its assets in (i) CDS cleared by a clearing
organization which are either (a) CDS index swaps based on multiple CDS
relating to the debt issued by different Reference Entities, or (b)
Single Name CDS based on CDS relating to the debt issued by a single
Reference Entity; (ii) futures contracts based on CDS or other similar
futures contracts; and (iii) U.S. Treasury securities, money market
instruments, and cash. In order to gain short exposure to the high
yield credit market, the Fund will normally be a net protection buyer
under its CDS, i.e., it will be required to make the ongoing payments
specified under such contracts that represent the cost of purchasing
protection from adverse credit events relating to a Reference Entity.
    If the Fund is successful in meeting its objective, its NAV should
generally decrease when the North American high yield credit market is
improving. Conversely, its NAV should generally increase as the North
American high yield credit market is deteriorating.
Non-Principal Fund Investments
    While each Fund will invest, under normal market conditions,
substantially all of its assets as described above under each Fund's
principal investment strategies, each Fund may invest in, to the extent
that CDS cleared by a clearing organization are not available, fully
collateralized non-cleared CDS transactions \27\, and (i) to the extent
available, options that are cleared through a clearing organization
regulated or subject to the oversight of the CFTC or the Commission
\28\ and (ii) if options cleared through a clearing organization are
not available, fully collateralized non-cleared OTC options, in each
case, relating to the following: options on CDS, options on CDS
futures, options on CDS indexes and options on U.S. Treasury securities
for bona fide hedging; attempting to offset changes in the value of its
principal investments held or expected to be acquired or be disposed
of; attempting to gain exposure to a particular market, index or
instrument; or other risk management purposes.
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    \27\ The Adviser represents that each of the Funds' CDS
transactions, whether cleared or uncleared, and the options
described above will be subject to CFTC and/or Commission reporting,
including the reporting of detailed transaction data to swap data
repositories (``SDRs) subject to CFTC and/or the Commission
oversight or regulation. See Swap Data Recordkeeping and Reporting
Requirements, 77 F.R. 2136 (January 13, 2012). The Adviser
represents that all swap transaction data, including data on
options, will be available to the CFTC and the Commission and
certain bank or other regulators. In addition, with certain
exceptions (e.g., delays for large block trades), a portion of each
CDS transaction's data will be available to major market data
vendors on a real time, though anonymous, basis. See Real-Time
Public Reporting of Swap Transaction Data, 77 F.R.1182 (January 9,
2012).
    \28\ The Adviser represents that Fund transactions in options
cleared through a clearing organization that have been designated by
the CFTC or the Commission as ``made available to trade'' will be
executed by the Funds on an exchange or on a swap execution facility
subject to CFTC and/or Commission oversight or regulation.
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    Each Fund may also utilize other types of swap agreements,
including, but not limited to, total return swaps on debt, equity or
CDS or indexes relating to the foregoing, bond or corporate credit
index swaps, and interest rate swaps. A Fund may utilize these swap
agreements in an attempt to gain exposure to the investments used to
meet its investment objective in a market without actually purchasing

those investments, or to hedge a position.
    Each Fund may invest in the securities of other investment
companies consistent with the requirements of Section 12(d)(1) of the
1940 Act, or any rule, regulation or order of the Commission or
interpretation thereof.
    Each Fund may enter into repurchase agreements with financial
institutions, which may be deemed to be loans. Each Fund follows
certain procedures designed to minimize the risks inherent in such
agreements. These procedures include effecting repurchase transactions
only with large, well-capitalized and well-established financial
institutions whose condition will be continually monitored by the
Adviser. In addition, the value of the collateral underlying the
repurchase agreement will always be at least equal to the repurchase
price, including any accrued interest earned on the repurchase
agreement.
The Benchmark Indices
    The Markit CDX North American Investment Grade 5-year Total Return
Index is composed of credit default swaps relating to 125 equally-
weighted, investment grade, unaffiliated Reference Entities. All
entities are domiciled in North America. A new series of the Index is
issued every six months in March and September, which effectively
serves as a rebalancing to reflect the then current corporate credit
markets.
    The Markit CDX North American High Yield 5-year Total Return Index
is composed of credit default swaps relating to 100 equally-weighted,
non-investment grade, unaffiliated Reference Entities. All entities are
domiciled in North America. A new series of the Index is issued every
six months in March and September, which effectively serves as a
rebalancing to reflect the then current corporate credit markets.
Benchmark Methodology and Construction
    Markit Group Limited (``Markit'') has developed and published
specific rules for each Index, most recently updated on March 2013 in
the publicly available ``Markit CDX High Yield & Markit CDX Investment
Grade Index Rules'' \29\ (the ``Rules'').
---------------------------------------------------------------------------

    \29\ http://www.markit.com/assets/en/docs/products/data/indices/credit-index-annexes/Markit%20CDX%20HY%20and%20IG%20Rules%20Mar%202013.pdf
---------------------------------------------------------------------------

    The composition of an Index shall be determined by Markit as the
``Administrator'' in accordance with the Rules, which are formulaic,
provided that in making any determination the Administrator may depart
from, or otherwise make an exception to, the Rules. Generally, the
composition of membership in each Index is determined by selecting
unique Reference Entities with the most liquid credit derivatives based
on trailing six-month trading volume published on DTCC Trade
Information Warehouse. Once a series of an Index is issued, no
additional companies are added to the Index as component members of
such Index.
    Component members of an Index may be removed under certain
circumstances, including a credit event such as a default. When a new
series of an Index is released every six months, the component members
of an Index are updated to reflect changes in the markets and the new
component members are approved by the Administrator and published on
Markit's Web site.
    Each Reference Entity has an equal weighting in the applicable CDX
Index. A list of Reference Entities for the CDX Indices is published
from time to time by or on behalf of Markit.
Other Fund Characteristics
    Each of the Funds may hold up to an aggregate amount of 15% of its
net assets in illiquid investments (calculated at the time of
investment) in accordance with Commission staff guidance. The Funds
will monitor their portfolio liquidity on an ongoing basis to determine
whether, in light of current circumstances, an adequate level of
liquidity is being maintained, and will take appropriate steps in order
to maintain adequate liquidity if, through a change in values, net
assets, or other circumstances, more than 15% of a Fund's net assets
are held in illiquid investments. Illiquid investments include
investments subject to contractual or other restrictions on resale and
other instruments that lack readily available markets as determined in
accordance with Commission staff guidance.\30\
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    \30\ 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).
---------------------------------------------------------------------------

    The Funds will not invest in any equity securities except for
investment company securities.
    The Funds will be non-diversified, which means that a Fund may
invest its assets in a smaller number of issuers than a diversified
fund.\31\
---------------------------------------------------------------------------

    \31\ The diversification standard is set forth in Section
5(b)(1) of the 1940 Act.
---------------------------------------------------------------------------

    Each of the Funds' investments, including derivatives, will be
consistent with its investment objective.
Net Asset Value
    The NAV per Share of a Fund will be computed by dividing the value
of the net assets of the Fund (i.e., the value of its total assets less
total liabilities) by the total number of Shares of the Fund
outstanding, rounded to the nearest cent. Expenses and fees, including
without limitation, the management, administration and distribution
fees, will be accrued daily and taken into account for purposes of
determining NAV per Share. The NAV per Share for a Fund will be
calculated by The Bank of New York Mellon and determined as of the
close of the regular trading session on the Exchange (ordinarily 4:00
p.m., Eastern Time (``E.T.'')) on each day that the Exchange is open.
    In computing a Fund's NAV, a Fund's holdings will be valued based
on their last readily available market price. Price information on
listed investments will be taken from the exchange where the investment
is primarily traded. The Adviser intends to use clearing organization
settlement prices, e.g., Markit ICE Settlement Prices or CME Clearing
CDS Settlement Prices (determined as of 4:00 p.m. E.T.) for the
valuation of its CDS. The Adviser will use the closing prices on the
relevant futures exchanges (determined at the earlier of the close of
such futures exchanges or 4:00 p.m.) for the valuation of its futures
contracts based on CDS or other similar futures contracts. The Adviser
intends to use clearing organization settlement prices for the
valuation of its options that are cleared through a clearing
organization regulated or subject to the oversight of the CFTC or the
Commission. Money market instruments and U.S. Treasury securities will
be valued based on price quotations or other equivalent indications of
value provided by a third-party pricing service.
    The Adviser will calculate or determine the value of all other
investments using market quotations, if available, from third-party
pricing

services or brokers and dealers, as described below. With respect to
non-cleared CDS and OTC options, to the extent that agreement is
reached with any counterparties on pricing methodologies for
determining end-of-day settlement prices, the Adviser will use such
information for purposes of determining the asset's value. Accordingly,
the Funds plan to use this and other end of day pricing data provided
by third parties, as described under Availability of Information below,
for purposes of determining their respective NAVs. Total return swaps,
bond or corporate credit index swaps and interest rate swaps will
normally be valued on the basis of quotes obtained from brokers and
dealers or third-party pricing services. The Adviser will use the
latest NAV published by the investment company and major market data
vendors as of 4:00 p.m. E.T. for the valuation of its investment
company security investments, other than shares of exchange-listed
investment company securities. Shares of exchange-listed investment
company securities will be valued at market value, which will generally
be determined using the last reported official closing or last trading
price on the exchange or market on which the securities are primarily
traded at the time of valuation. Repurchase agreements will be valued
based on price quotations or other equivalent indications of value
provided by a third-party pricing service. Other portfolio securities
and assets for which market quotations are not readily available or
determined to not represent the current fair value will be valued based
on fair value as determined in good faith by the Adviser in accordance
with procedures adopted by the Board of Trustees and with the 1940 Act.
Purchases and Redemptions of Creation Units
    According to the Registration Statement, each Fund will offer and
sell Creation Units through the Distributor on a continuous basis at
the NAV next determined after an order in proper form is received by
the Distributor. The NAV of each Fund will be determined as of the
close of regular trading on the NYSE Arca (ordinarily 4:00 p.m. E.T.)
on each business day. Each Fund will sell and redeem Creation Units
only on a business day. A Creation Unit will consist of at least 50,000
Shares; however, the size of a Creation Unit may change in the future.
    Shares will be purchased and redeemed in Creation Units. The Funds
will generally sell and redeem Creation Units entirely for cash to the
extent permissible under the Trust's Exemptive Application and
Exemptive Order.
    In the case of in-kind purchases and redemptions of Creation Units,
purchasers will be required to purchase Creation Units by making an in-
kind deposit of specified instruments (``Deposit Instruments''), and
shareholders redeeming their Shares will receive an in-kind transfer of
specified instruments (``Redemption Instruments'').\32\ On any given
business day, the names and quantities of the instruments that
constitute the Deposit Instruments and the names and quantities of the
instruments that constitute the Redemption Instruments will be
identical, and these instruments may be referred to, in the case of
either a purchase or a redemption, as the ``Creation Basket.'' In
addition, generally, the Creation Basket will correspond pro rata to
the positions in a Fund's portfolio (including CDS and cash positions).
---------------------------------------------------------------------------

    \32\ The Funds must comply with the federal securities laws in
accepting Deposit Instruments and satisfying redemptions with
Redemption Instruments, including that the Deposit Instruments and
Redemption Instruments are sold in transactions that would be exempt
from registration under the Securities Act. In accepting Deposit
Instruments and satisfying redemptions with Redemption Instruments
that are restricted securities eligible for resale pursuant to rule
144A under the Securities Act, the Funds will comply with the
conditions of Rule 144A.
---------------------------------------------------------------------------

    If there is a difference between the NAV attributable to a Creation
Unit and the aggregate market value of the Creation Basket exchanged
for the Creation Unit, the party conveying instruments with the lower
value will also pay to the other an amount in cash equal to that
difference (the ``Cash Amount''). In addition, in the event a Deposit
Instrument included in a Creation Basket cannot be transferred or
novated, the market value of that instrument will be paid and added to
the Cash Amount.
    As an actively managed fund, the allocation of a Fund's investments
may change over time. Generally, it is not expected that a Fund's
allocation of investments will change significantly over the course of
a day in a manner that would significantly impact an intra-day hedging
strategy. Authorized Participants and market makers have a wide variety
of instruments that they could utilize to hedge their intraday market
exposure, including corporate bonds, U.S. Treasuries, CDS, and
exchange-traded funds, including other Funds in the Trust that have an
investment objective that is inverse to that of a Fund whose Share
value is being hedged.
    In connection with creations or redemptions for cash, it is
expected each Fund will announce before the open of trading each
business day that all purchases and all redemptions on that day will be
made entirely in cash. On each business day, before the open of trading
on the Exchange, each Fund will cause to be published through the
National Securities Clearing Corporation (``NSCC'') the names and
quantities of the instruments comprising the Creation Basket, as well
as the estimated Cash Amount (if any), for that day. The published
Creation Basket will apply until a new Creation Basket is announced on
the following business day, and there will be no intra-day changes to
the Creation Basket except to correct error(s) in the Creation Basket
discovered after publication through the NSCC.
Placement of Orders To Purchase Creation Units
    All orders to purchase Creation Units must be placed with the
Distributor by or through an ``Authorized Participant,'' which is
either (i) a ``Participating Party,'' i.e., a broker or other
participant in the Continuous Net Settlement System (``CNS System'') of
the NSCC (``NSCC Process''), a clearing agency registered with the
Commission and affiliated with The Depository Trust Company (``DTC'')
or (ii) a DTC Participant, which, in either case, has executed a
``Participant Agreement'' with the Distributor with respect to the
purchase and redemption of Creation Units.
    All orders to purchase (and redeem) Creation Units must be received
by the Distributor in proper form one hour prior to the NAV calculation
time (``NAV Calculation Time''), which is generally at 4:00 p.m. E.T.
(meaning that orders must be received by 3:00 p.m.) on the business day
the order is placed in order for the purchaser to receive the NAV
determined on that date (``Transmittal Date''). On business days that
the Exchange closes early, a Fund may require an order for the purchase
of Creation Units to be submitted earlier during the day.
Placement of Orders To Redeem Creation Units
    Redemption requests must be placed by or through an Authorized
Participant. All orders to redeem Creation Units of a Fund must be
received by the Distributor in proper form no later than one hour prior
to the NAV Calculation Time on the Transmittal Date in order for the
redeeming investor to receive the

Fund's NAV determined on the Transmittal Date.
Portfolio Indicative Value
    The Portfolio Indicative Value (``PIV'') as defined in NYSE Arca
Equities Rule 8.600(c)(3) of Shares of each Fund will be widely
disseminated by one or more major market data vendors at least every
fifteen seconds during the Exchange's Core Trading Session.\33\ An
unaffiliated third-party retained by the Trust (the ``Calculation
Agent'') will calculate the PIV throughout the trading day for each
Fund by (i) calculating the marked-to-market gains/losses of CDS and
all other financial instruments held by a Fund on the basis described
below, (ii) calculating the value of a Fund's cash, cash equivalents,
U.S. Treasury securities and other assets, (iii) adding the marked-to-
market gains and losses on the financial instruments and the value of
the other assets of the Fund to arrive at an asset value, and (iv)
dividing that asset value by the total Shares outstanding to obtain a
current PIV.
---------------------------------------------------------------------------

    \33\ Currently, it is the Exchange's understanding that several
major market data vendors widely disseminate PIVs taken from the
Consolidated Tape Association (``CTA'') or other data feeds.
---------------------------------------------------------------------------

    Gains and losses on CDS will be determined for purposes of
calculating the PIV based on market quotations regularly received from
third-party subscription services.\34\ These quotations may include
prices at which transactions were actually executed, ``executable
quotations,'' which provide a firm price at which the dealer would buy
or sell a specified notional amount of CDS, and ``indicative
quotations,'' which, while not necessarily executable, provide an
indication of the price at which such dealer would buy or sell a
specified notional amount. The Funds will not be involved in, or
responsible for, the calculation or dissemination of any such amount
and will make no warranty as to its accuracy.
---------------------------------------------------------------------------

    \34\ Dealer quotations on a particular CDS will typically be
provided notwithstanding a default by a Reference Entity under that
swap. The price at which the CDS will be bought or sold will be
affected by such a default.
---------------------------------------------------------------------------

Availability of Information
    The Funds' Web site (http://www.etspreads.com), 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
site will include additional quantitative information updated on a
daily basis, including, for each Fund, (1) daily trading volume, the
prior business day's reported closing price, NAV and mid-point of the
bid/ask spread at the time of calculation of such NAV (the ``Bid/Ask
Price''),\35\ 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. On each business day, before commencement
of trading in Shares in the Core Trading Session on the Exchange, the
Funds will disclose on the Web site the Disclosed Portfolio as defined
in proposed Rule 8.600(c)(2) that will form the basis for the Funds'
calculation of NAV at the end of the business day.\36\ The Web site
information will be publicly available at no charge.
---------------------------------------------------------------------------

    \35\ The Bid/Ask Price of Fund Shares will be determined using
mid-point of the highest bid and the lowest offer on the Exchange as
of the time of calculation of a Fund's NAV. The records relating to
Bid/Ask Prices will be retained by the Funds and their service
providers.
    \36\ Under accounting procedures 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.
---------------------------------------------------------------------------

    On a daily basis, the Adviser will disclose on behalf of each Fund
each portfolio holding and financial instrument of a Fund the following
information: Ticker symbol (if applicable), name of security and
financial instrument, number of shares, if applicable, and dollar value
of securities and financial instruments held in the portfolio, and
percentage weighting of the holding and financial instrument in the
portfolio. The Web site information will be publicly available at no
charge. Market participants, particularly large institutional
investors, regularly receive executable and indicative quotations on
CDS from dealers. In addition, intra-day and end-of-day prices for all
Single Name CDS, CDS index swaps, or other financial instruments held
by a Fund will be available through major market data vendors or
broker-dealers or on the exchanges on which they are traded. Major
market vendors which provide intra-day and end-of-day prices for both
Single Name CDS and CDS index swaps include Markit, CMA and Bloomberg.
Bloomberg, Thomson Reuters Corporation (``Thomson Reuters'') and
similar data vendors provide intra-day and end-of-day pricing data for
U.S. Treasury securities and money market instruments. Exchanges which
provide intraday and end-of-day prices for futures and options on
futures include ICE Futures and CME Group. Broker-dealers provide
intraday and end-of-day prices for non-cleared swaps and options,
including options on Single Name CDS and options on CDS index swaps.
    ICE Clear Credit LLC and CME Clearing provide daily price and
transaction information for swaps that it or its affiliate clears by
subscription to its members and other market participants.
Additionally, pricing intraday regarding various CDS index swaps is
provided free to the public, with a fifteen minute delay, on the Markit
Web site (https://source.markit.com). Daily trading volume of cleared
swaps transacted via the ICE Clear Credit LLC and CME Clearing clearing
organizations is also available through their respective Web sites.
    Another source of intra-day information about Single Name CDS
prices is the market for OTC corporate bonds on which the CDS are
based, and the Adviser requests that there is a significant amount of
information available about the intra-day pricing of corporate bonds
and the amount of such information is increasing. Because CDS represent
the credit risk component of corporate bonds, and the effect of
interest rate changes on the prices of corporate bonds is readily
calculable, market professionals are able to obtain substantial
information about the intra-day value of CDS based on data on the
intra-day value of the underlying corporate bonds. While short-term
variations between the bond and CDS markets do arise, and may occur
more frequently when such markets are volatile, the value of the
underlying debt securities is important and useful in valuing related
CDS.
    One source of bond price information is the Financial Industry
Regulatory Authority's (``FINRA'') Trace Reporting and Compliance
System (``TRACE''). TRACE reports executed prices on corporate bonds,
including high-yield bond transactions. TRACE reported prices are
available without charge on the FINRA Web site on a ``real time'' basis
(subject to a fifteen minute delay) and also are available by
subscription from various information providers (e.g., Bloomberg). In
addition, authorized participants and other market participants,
particularly those that regularly deal or trade in corporate bonds,
have access to intra-day corporate bond prices from a variety of
sources other than TRACE, such as Thomson Reuters, Interactive Data and
MarketAxess.
    The intraday, closing and settlement prices of U.S. Treasury
securities,

money market instruments and repurchase agreements will be readily
available from published or other public sources, or major market data
vendors such as Bloomberg and Thomson Reuters. Price information
regarding exchange-traded options is available from the exchanges on
which such instruments are traded and from Market Data Express's (an
affiliate of Chicago Board Options Exchange) Customized Option Pricing
Service. Price information regarding OTC options is available from
major market data vendors. ICE Futures provides end-of-day prices for
CDS futures or other similar futures contracts. Intra-day and closing
price information for shares of exchange-listed investment company
securities are available from the exchange on which such securities are
principally traded and from major market data vendors. The NAV of any
investment company security investment will be readily available on the
Web site of the relevant investment company and from major market data
vendors. Major market data vendors also provide intra-day and end-of-
day prices for total return swaps, bond or corporate credit index
swaps, and interest rate swaps.
    Investors can also obtain the Trust's Statement of Additional
Information (``SAI''), the Fund's Shareholder Reports, and its Form N-
CSR and Form N-SAR, filed twice a year. The Trust's SAI and Shareholder
Reports are available free upon request from the Trust, and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commission's Web site at http://www.sec.gov.
Information regarding market price and trading volume of the Shares
will be continually available on a real-time basis throughout the day
on brokers' computer screens and other electronic services. Information
regarding the previous day's closing price and trading volume
information may be published daily in the financial section of
newspapers. Quotation and last sale information for the Shares and
exchange-traded investment company securities will be available via the
CTA high-speed line. In addition, the PIV, as defined in NYSE Arca
Equities Rule 8.600(c)(3), will be disseminated at least every 15
seconds during the Core Trading Session by one or more major market
data vendors. The dissemination of the PIV, together with the Disclosed
Portfolio, will allow investors to determine the value of the
underlying portfolio of a Fund on a daily basis and to provide a close
estimate of that value throughout the trading day.
    Additional information regarding the Shares and the Funds,
including investment strategies, risks, creation and redemption
procedures, fees, portfolio holdings disclosure policies, distributions
and taxes, is contained in the Registration Statement. All terms
relating to the Funds that are referred to, but not defined in, this
proposed rule change are defined in the Registration Statement or the
Exemptive Application.
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 a Fund.\37\ Trading in Shares of a Fund will
be halted if the circuit breaker parameters in NYSE Arca Equities Rule
7.12 have been reached. Trading also 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 holdings and/or the financial
instruments comprising the Disclosed Portfolio of a Fund; or (2)
whether other unusual conditions or circumstances detrimental to the
maintenance of a fair and orderly market are present. Trading in the
Shares will be subject to NYSE Arca Equities Rule 8.600(d)(2)(D), which
sets forth circumstances under which Shares of a Fund may be halted.
---------------------------------------------------------------------------

    \37\ See NYSE Arca Equities Rule 7.12.
---------------------------------------------------------------------------

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. Shares will trade on
the NYSE Arca Marketplace from 4 a.m. to 8 p.m. E.T. in accordance with
NYSE Arca Equities Rule 7.34 (Opening, Core, and Late Trading
Sessions). The Exchange has appropriate rules to facilitate
transactions in the Shares during all trading sessions. As provided in
NYSE Arca Equities Rule 7.6, Commentary .03, the minimum price
variation (``MPV'') for quoting and entry of orders in equity
securities traded on the NYSE Arca Marketplace is $0.01, with the
exception of securities that are priced less than $1.00 for which the
MPV for order entry is $0.0001.
    The Shares will conform to the initial and continued listing
criteria under Rule 8.600. The Exchange represents that, for initial
and/or continued listing, the Funds will be in compliance with Rule
10A-3 \38\ under the Act, as provided by NYSE Arca Equities Rule 5.3. 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 and the
Disclosed Portfolio will be made available to all market participants
at the same time.
---------------------------------------------------------------------------

    \38\ 17 CFR 240.10A-3.
---------------------------------------------------------------------------

Surveillance
    The Exchange represents that trading in the Shares will be subject
to the existing trading surveillances, administered by the FINRA's on
behalf of the Exchange, which are designed to detect violations of
Exchange rules and applicable federal securities laws.\39\ The Exchange
represents that these procedures are adequate to properly monitor
Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and federal securities laws
applicable to trading on the Exchange.
---------------------------------------------------------------------------

    \39\ FINRA surveils trading on the Exchange pursuant to a
regulatory services agreement. The Exchange is responsible for
FINRA's performance under this regulatory services agreement.
---------------------------------------------------------------------------

    The surveillances referred to above generally focus on detecting
securities trading outside their normal patterns, which could be
indicative of manipulative or other violative activity. When such
situations are detected, surveillance analysis follows and
investigations are opened, where appropriate, to review the behavior of
all relevant parties for all relevant trading violations.
    FINRA, on behalf of the Exchange, will communicate as needed
regarding trading in the Shares, futures, exchange-listed options and
exchange-listed investment company securities with other markets and
other entities that are members of the Intermarket Surveillance Group
(``ISG''), and FINRA, on behalf of the Exchange, may obtain trading
information regarding trading in the Shares, futures, exchange-listed
options and exchange-listed investment company securities from such
markets and other entities. In addition, the Exchange may obtain
information regarding trading in the Shares, futures, exchange-listed
options and exchange-listed investment company securities from markets
and other entities that are members of ISG or with which the Exchange
has in place a comprehensive surveillance sharing agreement.\40\ FINRA,
on behalf of the Exchange, is able to access, as needed, trade

information for certain fixed income securities held by the Funds
reported to FINRA's TRACE.
---------------------------------------------------------------------------

    \40\ For a list of the current members of ISG, see
www.isgportal.org. 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.
---------------------------------------------------------------------------

    In addition, the Exchange also has a general policy prohibiting the
distribution of material, non-public information by its employees.
Information Bulletin
    Prior to the commencement of trading, the Exchange will inform its
ETP Holders in an Information Bulletin (``Bulletin'') of the special
characteristics and risks associated with trading the Shares.
Specifically, the Bulletin will discuss the following: (1) The
procedures for purchases and redemptions of Shares in Creation Unit
aggregations (and that Shares are not individually redeemable); (2)
NYSE Arca Equities Rule 9.2(a), which imposes a duty of due diligence
on its ETP Holders to learn the essential facts relating to every
customer prior to trading the Shares; (3) the risks involved in trading
the Shares during the Opening and Late Trading Sessions when an updated
PIV will not be calculated or publicly disseminated; (4) how
information regarding the PIV is disseminated; (5) the requirement that
ETP Holders deliver a prospectus to investors purchasing newly issued
Shares prior to or concurrently with the confirmation of a transaction;
and (6) trading information.
    In addition, the Bulletin will reference that the Funds are subject
to various fees and expenses described in the Registration Statement.
The Bulletin will discuss any exemptive, no-action, and interpretive
relief granted by the Commission from any rules under the Act. The
Bulletin will also disclose that the NAV for the Shares will be
calculated after 4:00 p.m. E.T. each trading day.
2. Statutory Basis
    The basis under the Act for this proposed rule change is the
requirement under Section 6(b)(5) \41\ that an exchange have rules that
are designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, to remove
impediments to, and perfect the mechanism of a free and open market
and, in general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \41\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    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 NYSE Arca Equities Rule
8.600. To meet its respective investment objective, under normal market
conditions, each Fund intends to invest substantially all of its assets
in (i) CDS cleared by a clearing organization which are either (a) CDS
index swaps, including CDX Index swaps, based on multiple CDS relating
to the debt issued by different Reference Entities, or (b) Single Name
CDS; (ii) futures contracts based on CDS or other similar futures
contracts, and (iii) U.S. Treasury securities, money market
instruments, and cash. The Exchange has in place surveillance
procedures that are adequate to properly monitor trading in the Shares
in all trading sessions and to deter and detect violations of Exchange
rules and applicable federal securities laws. FINRA, on behalf of the
Exchange, will communicate as needed regarding trading in the Shares,
futures, exchange-listed options and exchange-listed investment company
securities with other markets and other entities that are members of
the ISG, and FINRA, on behalf of the Exchange, may obtain trading
information regarding trading in the Shares, futures, exchange-listed
options and exchange-listed investment company securities from such
markets and other entities. In addition, the Exchange may obtain
information regarding trading in the Shares, futures, exchange-listed
options and exchange-listed investment company securities from markets
and other entities that are members of ISG or with which the Exchange
has in place a comprehensive surveillance sharing agreement.
    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 Adviser is affiliated with a broker-dealer and has represented
that it has implemented a fire wall with respect to its broker-dealer
affiliate regarding access to information concerning the composition
and/or changes to the applicable portfolio. Information regarding
market price and trading volume of the Shares will be continually
available on a real-time basis throughout the day on brokers' computer
screens and other electronic services. Pricing and market information
for CDS (including CDX Index swaps) is available by subscription and
information on pricing is distributed on Bloomberg and other similar
resources. ICE Clear Credit LLC provides daily price and transaction
information by subscription to its members and other market
participants. Additionally, pricing intraday regarding CDX Index swaps
is provided free to the public, with a fifteen minute delay, on the
Markit Web site. Market participants regularly receive executable and
indicative quotations on CDS from dealers. Authorized participants and
other market participants can also obtain CDS prices by subscription
from third parties through on-line services. Another source of intra-
day information about CDS prices is the market for OTC corporate bonds
on which the CDS are based. Information regarding the previous day's
closing price and trading volume information may be published daily in
the financial section of newspapers. Quotation and last sale
information for the Shares and exchange-traded investment company
securities will be available via the CTA high-speed line. In addition,
the PIV, as defined in NYSE Arca Equities Rule 8.600(c)(3), will be
disseminated at least every 15 seconds during the Core Trading Session
by one or more major market data vendors. On each business day, each
Fund will disclose on its Web site the Disclosed Portfolio that will
form the basis for a Fund's calculation of NAV at the end of the
business day. The Exchange will obtain a representation from the issuer
of the Shares that the NAV per Share will be calculated daily and that
the NAV and the Disclosed Portfolio will be made available to all
market participants at the same time. Trading in Shares of a Fund will
be halted if the circuit breaker parameters in NYSE Arca Equities Rule
7.12 have been reached or because of market conditions or for reasons
that, in the view of the Exchange, make trading in the Shares
inadvisable, and trading in the Shares will be subject to NYSE Arca
Equities Rule 8.600(d)(2)(D), which sets forth circumstances under
which Shares of a Fund may be halted. In addition, as noted above,
investors will have ready access to information regarding the Fund's
holdings, the PIV, the Disclosed Portfolio, and quotation and last sale
information for the Shares.
    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 products 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. In addition, as noted above, investors
will have ready access to

information regarding the Fund's holdings, the PIV, the Disclosed
Portfolio, and quotation and last sale information for the Shares.

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
actively-managed exchange-traded products that are based on swaps
indexes and 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

    No written comments were solicited or received with respect to 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 after
publication (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 self-regulatory organization 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-NYSEArca-2013-144 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSEArca-2013-144. 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 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; 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-NYSEArca-2013-144 and should
be submitted on or before February 5, 2014.
---------------------------------------------------------------------------

    \42\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\42\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-00605 Filed 1-14-14; 8:45 am]
BILLING CODE 8011-01-P


[Federal Register Volume 77, Number 188 (Thursday, September 27, 2012)]
[Notices]
[Pages 59427-59429]
[FR Doc No: 2012-23767]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67908; File No. SR-MSRB-2012-06]

Self-Regulatory Organizations; Municipal Securities Rulemaking
Board; Order Granting Approval of a Proposed Rule Change To Amend Rule
G-34 on CUSIP Numbers, New Issue, and Market Information Requirements

September 21, 2012.

I. Introduction

    On June 28, 2012, the Municipal Securities Rulemaking Board
(``MSRB'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change consisting of amendments to Rule
G-34 on CUSIP numbers, new issue, and market information requirements.
The proposed rule change was published for comment in the Federal
Register on July 10, 2012.\3\ The Commission received three comment
letters regarding the proposed rule change.\4\ On August 23, 2012, the
MSRB granted an extension of time for the Commission to act on the
filing until September 14, 2012. On September 11, 2012, the MSRB
granted a second extension of time until September 21, 2012. On
September 17, 2012, the MSRB submitted a response to the comment
letters.\5\ This order grants approval of the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 67344 (July 3,
2012), 77 FR 40668 (``Notice'').
    \4\ See Letter to Elizabeth M. Murphy, Secretary, Commission,
from Susan Gaffney, Director, Federal Liaison Center, Government
Finance Officers Association, dated August 7, 2012 (``GFOA
Letter''); and Web comments from Arthur Sinkler, dated July 8, 2012
(``Sinkler Letter''); and Shelly Frank, dated July 10, 2012 (``Frank
Letter''). The comments received by the Commission are available at
http://www.sec.gov/comments/sr-msrb-2012-06/msrb201206.shtml.
    \5\ See Letter to Elizabeth M. Murphy, Secretary, Commission,
from Karen Du Brul, Associate General Counsel, MSRB, dated September
17, 2002 (``MSRB's Response'').
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change

    The MSRB proposes to add new subsection (iv) to Rule G-34(a) to
prohibit any broker, dealer, or municipal securities dealer from using
the term ``not reoffered'' or other comparable term or designation
(e.g., ``NRO'') without also including the applicable price or yield
information about the securities in any of its written communications,
electronic or otherwise, sent by it or on its behalf from and after the
time of initial award of a new issue of municipal securities.\6\ For
purposes of MSRB Rule G-34(a)(iv), the ``time of initial award'' means
the earlier of (A) the ``Time of Formal Award'' as defined in MSRB Rule
G-34(a)(ii)(C)(1)(a),\7\ or (B) if applicable, the time at which the
issuer initially accepts the terms of a new issue of municipal
securities subject to subsequent formal award. The prohibition would
not apply to communications occurring prior to the time of initial
award of a new issue of municipal securities.\8\ According to the MSRB,
the proposed rule change will prohibit certain communications that
hinder price and market transparency, as well as facilitate new issue
price discovery.\9\
---------------------------------------------------------------------------

    \6\ See Proposed MSRB Rule G-34(a)(iv).
    \7\ MSRB Rule G-34(a)(ii)(C)(1)(a) defines ``Time of Formal
Award'' as ``for competitive issues, the later of the time the
issuer announces the award or the time the issuer notifies the
underwriter of the award, and for negotiated issues, the later of
the time the contract to purchase the securities from the issuer is
executed or the time the issuer notifies the underwriter of its
execution.''
    \8\ See Notice, supra note 3, at 40668. The MSRB also proposes
to delete existing subsection (e)(iii) of MSRB Rule G-34, which
includes provisions for compliance by dealers with certain
registration and testing requirements previously applicable with
respect to the start-up phase in 2008 of the New Issue Information
Dissemination System (``NIIDS'') operated by the Depository Trust
and Clearing Corporation (``DTCC''). The MSRB believes this
amendment will streamline Rule G-34 by eliminating language from the
Rule that no longer has any effect. See id. at 40669.
    \9\ See id. at 40669.
---------------------------------------------------------------------------

    MSRB Rules G-32 and G-34 set forth the reporting requirements for
new issues of municipal securities. MSRB Rule G-32 requires
underwriters to submit to the MSRB's Electronic Municipal Market Access
(``EMMA[supreg]'') system certain information about the new issue,
including the initial offering price or yield of all maturities, on or
prior to the date of first execution.\10\ This information becomes
available to the public on the EMMA Web site and to information vendors
and other market participants through subscription services immediately
upon submission

and typically by the end of the date of first execution.\11\ MSRB Rule
G-34 requires underwriters, with certain exceptions, to report to NIIDS
certain information about new issues of municipal securities within two
hours following the Time of Formal Award,\12\ including the initial
price or yield at which each maturity of the new issue of municipal
securities was sold.\13\
---------------------------------------------------------------------------

    \10\ See MSRB Rule G-32(b)(vi)(C)(1)(a).
    \11\ See Notice, supra note 3, at 40669. In addition, while MSRB
Rule G-14 requires dealers, with limited exceptions, to report the
actual prices at which municipal securities are sold to the MSRB's
Real-time Transaction Reporting System within 15 minutes of the time
of trade, in many cases initial trades by syndicate or selling group
members executed on the first day of trading at the published list
offering price may be reported by the end of the day. See id. at
40669 n.4.
    \12\ See supra note 7.
    \13\ See MSRB Rule G-34(a)(ii)(C). DTCC disseminates this
information to its subscribers, including market participants and
information vendors, upon submission by underwriters for
dissemination, typically within two hours following the Time of
Formal Award. See Notice, supra note 3, at 40669.
---------------------------------------------------------------------------

    While MSRB Rules G-32 and G-34 require underwriters to provide
initial offering price or yield for all maturities, including those
that are not reoffered, and prohibit underwriters from using the
designation of NRO in their submissions, the rules do not prevent
underwriters or other parties acting on the underwriters' behalf from
substituting the designation of NRO for the initial offering price or
yield for applicable maturities when sending information regarding a
new issue directly to third-party vendors.\14\ According to the MSRB,
the proposed rule change would result in information about the initial
offering prices or yields for NRO maturities being included in any
communication to or from third-party venders from and after the time of
initial award.\15\
---------------------------------------------------------------------------

    \14\ See id. at 40669. Third-party vendors may then disseminate
the new issue information, including the NRO designation without
accompanying initial offering price or yield, to their subscribers
shortly after receipt, and frequently before the complete initial
offering price or yield information becomes available through NIIDS
or the EMMA system. See id.
    \15\ See id.
---------------------------------------------------------------------------

III. Summary of Comments Received and the MSRB's Response

    The Commission received three comment letters on the proposed rule
change.\16\ One commenter generally supported the proposed rule change
but stated that underwriters should be required to provide yield
information.\17\ The other two commenters raised issues that were not
directly on point with the subject of the proposed rule change.
Accordingly, the concerns raised in those comment letters are not
addressed here.\18\
---------------------------------------------------------------------------

    \16\ See supra note 4.
    \17\ See GFOA Letter.
    \18\ For instance, the Frank and Sinkler Letters, as well as the
GFOA Letter, stated that the timeframe for submitting pricing
information should be shorter. Moreover, the Frank and Sinkler
Letters encouraged release of scales before the pricing of a new
issue is final and for retail investors to be able to purchase
municipal securities at the issue price. Although the comments are
not addressed here, those comments, as well as the MSRB's Response,
are available at http://www.sec.gov/comments/sr-msrb-2012-06/msrb201206.shtml.
---------------------------------------------------------------------------

    As stated above, one commenter opined that there should be
mandatory reporting of yield data.\19\ The commenter reasoned that
reporting just the maturity's price data requires issuers and investors
to calculate the corresponding yield, which makes the information less
useful to issuers and investors.\20\ According to the commenter, the
MSRB would take positive steps toward transparency and a more efficient
market by requiring yield data.\21\
---------------------------------------------------------------------------

    \19\ See GFOA Letter.
    \20\ See id.
    \21\ See id.
---------------------------------------------------------------------------

    In its response, the MSRB stated that it is not requiring yield,
rather than price or yield, because such a stipulation would create an
inconsistency with other MSRB rules and the MSRB's information
systems.\22\ The MSRB stated that it would be inconsistent to require
yield when underwriters voluntarily provide such information to the
public but permit price or yield when underwriters provide such
information pursuant to mandatory reporting requirements, including
submissions to EMMA and NIIDS, in connection with new issue
underwritings or on customer confirmations.\23\ The MSRB acknowledged
the value of having both price and yield data available for investors
and also stated that, in the context of the MSRB's existing process
outlined in its Long-Range Plan for Market Transparency Products
(``MSRB Long-Range Plan''),\24\ it would consider as a potential next
step whether to undertake a more universal approach to price and yield
information for new issues of municipal securities.\25\
---------------------------------------------------------------------------

    \22\ See MSRB Letter at 2.
    \23\ See id.
    \24\ See MSRB Notice 2012-06 (February 23, 2012).
    \25\ See MSRB Letter at 2, 3.
---------------------------------------------------------------------------

IV. Discussion and Commission Findings

    The Commission has carefully considered the proposed rule change,
as well as the comment letters received and the MSRB's response, and
finds that the proposed rule change is consistent with the requirements
of the Exchange Act and the rules and regulations thereunder applicable
to the MSRB.\26\ In particular, the proposed rule change is consistent
with Section 15B(b)(2)(C) of the Exchange Act, which provides that the
MSRB's rules shall be 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
regulating, clearing, settling, processing information with respect to,
and facilitating transactions in municipal securities and municipal
financial products, to remove impediments to and perfect the mechanism
of a free and open market in municipal securities and municipal
financial products, and, in general, to protect investors, municipal
entities, obligated persons, and the public interest.\27\
---------------------------------------------------------------------------

    \26\ In approving the proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
    \27\ 15 U.S.C. 78o-4(b)(2)(C).
---------------------------------------------------------------------------

    The Commission believes that the proposed rule change is reasonably
designed to remove impediments to and perfect the mechanism of a free
and open market in municipal securities by prohibiting certain
communications that hinder price and market transparency and by
facilitating new issue price discovery. The proposed rule change would
require underwriters to include the initial offering price or yield in
any written communication it sends to any party from and after the time
of initial award, including for those maturities that are not
reoffered. Although MSRB Rules G-32 and G-34 require the initial
offering price or yield for all maturities, including those that are
not reoffered, and prohibit underwriters from using the designation of
NRO in their submissions, this information may not be readily available
until the end of the date of first execution. Accordingly, the
Commission believes the proposed rule change should cause issuers,
investors, and other market participants to receive more timely
information about initial offering prices or yields (i.e., prior to the
submission deadlines of MSRB Rules G-32 and G-34). This should aid
issuers in pricing their own same-day transactions and benefit
investors and other market participants seeking more contemporaneous
price information.
    The Commission also believes the proposed rule change could reduce
pricing inefficiencies in the municipal securities market by providing
timelier price or yield information to a larger universe of market
participants. Currently, market participants have different levels of
access to price or

yield information about new issues of municipal securities, which could
contribute to differences in prices for similar securities. The
Commission believes price transparency is vital for assuring that
markets are fair and efficient, and that the proposed rule change
should help enhance price transparency and lead to greater price
discovery in the primary market.\28\
---------------------------------------------------------------------------

    \28\ The Commission also believes that the MSRB's proposal to
delete existing subsection (e)(iii) of MSRB Rule G-34 is consistent
with the Act as it would eliminate language from the Rule that no
longer has any effect.
---------------------------------------------------------------------------

    With respect to the comment that reporting of yield data should be
mandatory, the Commission recognizes that other MSRB rules do not
require reporting of yield, but rather allow reporting of yield or
price, and that requiring yield in the context of voluntary submissions
in the instant proposed rule change would be inconsistent with existing
mandatory reporting requirements under other MSRB rules. The
Commission, however, notes that the MSRB has acknowledged the value of
having both price and yield data available to investors and understands
that, in connection with the MSRB's Long-Range Plan, it would consider
a more universal approach to reporting of price and yield information
for new issues of municipal securities.\29\
---------------------------------------------------------------------------

    \29\ See Notice, supra note 3, at 20670. See also MSRB's
Response at 2, 3.
---------------------------------------------------------------------------

V. Conclusion

    For the foregoing reasons, the Commission finds that the proposed
rule change is consistent with the requirements of the Exchange Act and
the rules and regulations thereunder applicable to the MSRB and, in
particular, Section 15B(b)(2)(C) \30\ of the Exchange Act. The proposal
will become effective on the first calendar day of the next succeeding
month beginning at least twenty-eight calendar days after the date of
the Commission's order approving the proposed rule change.
---------------------------------------------------------------------------

    \30\ 15 U.S.C. 78o-4(b)(2)(C).
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\31\ that the proposed rule change (SR-MSRB-2012-06) is
approved.
---------------------------------------------------------------------------

    \31\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\32\
---------------------------------------------------------------------------

    \32\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-23767 Filed 9-26-12; 8:45 am]
BILLING CODE 8011-01-P