[Federal Register Volume 86, Number 192 (Thursday, October 7, 2021)]
[Notices]
[Pages 55881-55888]
[FR Doc No: 2021-21877]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-93230; File No. SR-CboeBZX-2020-070]

Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order
Setting Aside Action by Delegated Authority and Approving a Proposed
Rule Change, as Modified by Amendment Nos. 1 and 3, To List and Trade
Shares of the -1x Short VIX Futures ETF Under BZX Rule 14.11(f)(4)
(Trust Issued Receipts)

October 1, 2021.

I. Introduction

    On September 4, 2020, Cboe BZX Exchange, Inc. (``BZX'') filed with
the Securities and Exchange Commission (``Commission''), pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'' or
``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule
change to list and trade shares (``Shares'') of the -1x Short VIX
Futures ETF (``Fund''), a series of VS Trust (``Trust''), under BZX
Rule 14.11(f)(4).\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The proposed rule change was published for comment in the
Federal Register on September 23, 2020. See Securities Exchange Act
Release No. 89901 (Sept. 17, 2020), 85 FR 59836 (``Notice''). On
October 30, 2020, the Commission extended the time period for
Commission action on the proposed rule change. See Securities
Exchange Act Release No. 90292, 85 FR 70678 (Nov. 5, 2020). On
December 14, 2020, the Commission instituted proceedings pursuant to
Section 19(b)(2)(B) of the Act to determine whether to approve or
disapprove the proposed rule change. See Securities Exchange Act
Release No. 90659, 85 FR 82536 (Dec. 18, 2020) (``OIP''). On January
28, 2021, the Exchange filed Amendment No. 1 to the proposed rule
change, which replaced and superseded the proposed rule change as
originally filed. On February 16, 2021, the Exchange submitted
Amendment No. 2 to the proposed rule change and, on February 19,
2021, the Exchange withdrew Amendment No. 2. On February 19, 2021,
the Exchange filed partial Amendment No. 3 to the proposed rule
change.
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    On March 5, 2021, the Commission, acting through authority
delegated to the Division of Trading and Markets (``Division''),\4\
noticed the filing of Amendment Nos. 1 and 3 and approved the proposed
rule change, as modified by Amendment Nos. 1 and 3, on an accelerated
basis.\5\ On March 5, 2021, the Assistant Secretary of the Commission
notified BZX that, pursuant to Commission Rule of Practice 431,\6\ the
Commission would review the Division's action pursuant to delegated
authority and that the Division's action pursuant to delegated
authority was stayed until the Commission ordered otherwise.\7\ On
April 7, 2021, the Commission issued a scheduling order, pursuant to
Commission Rule of Practice 431, providing until May 7, 2021 for any
party or other person to file a written statement in support of, or in
opposition to, the Approval Order.\8\
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    \4\ 17 CFR 200.30-3(a)(12).
    \5\ See Securities Exchange Act Release No. 91264 (Mar. 5,
2021), 86 FR 13939 (Mar. 11, 2021) (``Approval Order'').
    \6\ 17 CFR 201.431.
    \7\ See letter from J. Matthew DeLesDernier, Assistant
Secretary, Commission, to Kyle Murray, Vice President and Associate
General Counsel, Cboe Global Markets, dated March 5, 2021, available
at https://www.sec.gov/rules/sro/cboebzx/2018/34-91264-letter-from-assistant-secretary.pdf.
    \8\ See Securities Exchange Act Release No. 91502, 86 FR 19298
(Apr. 13, 2021). Comments on the proposed rule change, including
statements concerning the Approval Order are available at: https://www.sec.gov/comments/sr-cboebzx-2020-070/srcboebzx2020070.htm.
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    The Commission has conducted a de novo review of BZX's proposal,
giving careful consideration to the entire record, including all
comments and statements submitted, to determine whether the proposal is
consistent with the requirements of the Act and the rules and
regulations thereunder that are applicable to a national securities
exchange. Under Section 19(b)(2)(C) of the Act, the Commission must
approve the proposed rule change of a self-regulatory organization
(``SRO'') if the Commission finds that the proposed rule change is
consistent with the requirements of the Act and the applicable rules
and regulations thereunder; if it does not make such a finding, the
Commission must disapprove the proposed rule change.\9\ Additionally,
under Rule 700(b)(3) of the Commission's Rules of Practice, the
``burden to demonstrate that a proposed rule change is consistent with
the Act and the rules and regulations issued thereunder . . . is on the
self-regulatory organization that proposed the rule change.'' \10\ The
description of a proposed rule change, its purpose and operation, its
effect, and a legal analysis of its consistency with applicable
requirements must all be sufficiently detailed and specific to support
an affirmative Commission finding.\11\ Any failure of a self-regulatory
organization to provide the information required by Rule 19b-4 and
elicited on Form 19b-4 may result in the Commission not having a
sufficient basis to make an affirmative finding that a proposed rule
change is consistent with the Act and the rules and regulations
thereunder that are applicable to the self-regulatory organization.\12\
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    \9\ 15 U.S.C. 78s(b)(2)(C).
    \10\ 17 CFR 201.700(b)(3).
    \11\ See id.
    \12\ See id. See also 17 CFR 240.19b-4.
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    For the reasons discussed further herein, BZX has met its burden to
show

that the proposed rule change is consistent with the Act, and this
order sets aside the Approval Order and approves BZX's proposed rule
change, as modified by Amendment Nos. 1 and 3. In particular, the
Commission concludes that the record before the Commission demonstrates
that BZX's proposal is consistent with Section 6(b)(5) of the Act,\13\
which requires that the rules of a national securities exchange be
designed, among other things, 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 a national market system and, in general, to protect
investors and the public interest.
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    \13\ 15 U.S.C. 78f(b)(5).
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II. Summary of the Proposal

    The Exchange proposes to list and trade the Shares under BZX Rule
14.11(f)(4), which governs the listing and trading of Trust Issued
Receipts \14\ on the Exchange. Volatility Shares LLC (``Sponsor'')
serves as the Sponsor of the Trust. The Fund's investment objective is
to provide daily investment results (before fees and expenses) that
correspond to the performance of the Short VIX Futures Index (SHORTVOL)
(``Index''),\15\ which measures the daily inverse performance of a
theoretical portfolio of first- and second-month futures contracts on
the Cboe Volatility Index (``VIX'').\16\ The Index is comprised of VIX
futures contracts (``VIX Futures Contracts'').\17\ Specifically, the
Index components represent the prices of the two near-term VIX Futures
Contracts, replicating a position that rolls the nearest month VIX
Futures Contract to the next month VIX Futures Contract on a daily
basis in equal fractional amounts, resulting in a constant weighted
average maturity of approximately one month.\18\ The Index seeks to
reflect the returns that are potentially available from holding an
unleveraged short position in first- and second- month VIX Futures
Contracts by measuring its daily performance from the weighted average
price of VIX Futures Contracts.\19\
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    \14\ Rule 14.11(f)(4) applies to Trust Issued Receipts that
invest in ``Financial Instruments,'' defined in Rule
14.11(f)(4)(A)(iv) as any combination of investments, including
cash; securities; options on securities and indices; futures
contracts; options on futures contracts; forward contracts; equity
caps, collars and floors; and swap agreements.
    \15\ The Index is sponsored by Cboe Global Indexes (``Index
sponsor''). The Index sponsor is not a registered broker-dealer, but
is affiliated with a broker-dealer and has implemented and will
maintain a fire wall with respect to the broker-dealer affiliate
regarding access to information concerning the composition of and/or
changes to the Index. In addition, the Index sponsor has implemented
and will maintain procedures that are designed to prevent the use
and dissemination of material, non-public information regarding the
Index.
    \16\ The Exchange states that the VIX is an index designed to
measure the implied volatility of the S&P 500 over 30 days in the
future. See Amendment No. 1, supra note 3, at 4, n.4. The VIX is
calculated based on the prices of certain put and call options on
the S&P 500. See id. The VIX is reflective of the premium paid by
investors for certain options linked to the level of the S&P 500.
See id.
    \17\ The Exchange states that VIX Futures Contracts are measures
of the market's expectation of the level of VIX at certain points in
the future, and as such, will behave differently than current, or
spot, VIX. See id. at 8. While the VIX represents a measure of the
current expected volatility of the S&P 500 over the next 30 days,
the prices of VIX Futures Contracts are based on the current
expectation of what the expected 30-day volatility will be at a
particular time in the future (on the expiration date). See id.
    \18\ The Exchange states that the roll period usually begins on
the Wednesday falling 30 calendar days before the S&P 500 option
expiration for the following month (``Cboe VIX Monthly Futures
Settlement Date'') and runs to the Tuesday prior to the subsequent
month's Cboe VIX Monthly Futures Settlement Date. See id. at 10.
    \19\ The Exchange states that because VIX Futures Contracts
correlate to future volatility readings of VIX, while the VIX itself
correlates to current volatility, the Index and the Fund should be
expected to perform significantly differently from the inverse of
the VIX over all periods of time. See id. at 9-10. Further, unlike
the Index, the VIX, which is not a benchmark for the Fund, is
calculated based on the prices of certain put and call options on
the S&P 500. See id. at 10. According to the Exchange, while the
Index does not correspond to the inverse of the VIX, because it
seeks short exposure to VIX, the value of the Index, and by
extension the Fund, will generally rise as the VIX falls and fall as
the VIX rises. See id. at 9.
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    To pursue its investment objective, the Fund will primarily invest
in VIX Futures Contracts based on components of the Index. The Fund
will primarily acquire short exposure to the VIX through VIX Futures
Contracts, such that the Fund has exposure intended to approximate the
Index at the time of the net asset value (``NAV'') calculation of the
Fund. However, in the event that the Fund is unable to meet its
investment objective solely through investment in VIX Futures
Contracts, it may invest in over-the-counter swaps referencing the
Index or referencing particular VIX Futures Contracts comprising the
Index (``VIX Swap Agreements'') or in listed VIX options contracts
(``VIX Options Contracts,'' and, together with VIX Futures Contracts
and VIX Swap Agreements, ``VIX Derivative Products''). The Fund may
also invest in Cash or Cash Equivalents,\20\ which may serve as
collateral to the Fund's investments in VIX Derivative Products.
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    \20\ ``Cash and Cash Equivalents'' are short-term instruments
with maturities of less than 3 months, including the following: (i)
U.S. Government securities, including bills, notes, and bonds
differing as to maturity and rates of interest, which are either
issued or guaranteed by the U.S. Treasury or by U.S. Government
agencies or instrumentalities; (ii) certificates of deposit issued
against funds deposited in a bank or savings and loan association;
(iii) bankers' acceptances, which are short-term credit instruments
used to finance commercial transactions; (iv) repurchase agreements
and reverse repurchase agreements; (v) bank time deposits, which are
monies kept on deposit with banks or savings and loan associations
for a stated period of time at a fixed rate of interest; (vi)
commercial paper, which are short-term unsecured promissory notes;
and (vii) money market funds.
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    The Fund will seek to remain fully invested in VIX Derivative
Products (and Cash and Cash Equivalents as collateral) that provide
exposure to the Index consistent with its investment objective without
regard to market conditions, trends or direction. The Fund's investment
objective is a daily investment objective; that is, the Fund seeks to
track the Index on a daily basis, not over longer periods. Accordingly,
each day, the Fund will position its portfolio so that it can seek to
track the Index. The direction and extent of the Index's movements each
day will dictate the direction and extent of the Fund's portfolio
rebalancing. For example, if the level of the Index falls on a given
day, net assets of the Fund would fall. As a result, exposure to the
Index, through futures positions held by the Fund, would need to be
decreased. The opposite would be the case if the level of the Index
rises on a given day.
    The time and manner in which the Fund will rebalance its portfolio
is defined by the Index methodology but may vary from the Index
methodology depending upon market conditions and other circumstances
including the potential impact of the rebalance on the price of the VIX
Futures Contracts. The Sponsor will seek to minimize the market impact
of rebalances across all exchange traded products based on VIX Futures
Contracts (``VIX ETPs'') that it sponsors (``Funds'') \21\ on the price
of VIX Futures Contracts by limiting the Funds' participation, on any
given day, in VIX Futures Contracts to no more than 10% of the VIX
Futures Contracts traded on Cboe Futures Exchange, Inc. (``CFE'')
during any ``Rebalance Period,'' defined as any fifteen minute period
of continuous market trading.\22\ To limit

participation during periods of market illiquidity, the Sponsor, on any
given day, may vary the manner and period over which all funds it
sponsors are rebalanced, and as such, the manner and period over which
the Fund is rebalanced. The Sponsor believes that the Fund will enter
an Extended Rebalance Period most often during periods of extraordinary
market conditions or illiquidity in VIX Futures Contracts. In the event
that the Fund participates in an Extended Rebalance Period, the Fund
represents that it will notify the Exchange and the Commission of such
participation as soon as practicable, but no later than 9:00 a.m. ET on
the trading day following the event.\23\
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    \21\ For purposes of the filing, the Exchange states that the
Funds include the Fund and the 2x Long VIX Futures ETF (``Long
Fund''), but may in the future include additional VIX ETPs sponsored
by the Sponsor or its affiliates. See Securities Exchange Act
Release No. 93229 (Oct. 1, 2021) (SR-CboeBZX-2020-053) (``Long VIX
Approval'').
    \22\ In the event that the Funds expect to hit the 10% threshold
during the primary Rebalance Period from 3:45 p.m. to 4:00 p.m. ET,
the Funds will extend their respective rebalances into additional
Rebalance Periods and the Trade at Settlement (``TAS'') market. It
is expected that this extension will provide the Funds with the
flexibility to: begin rebalancing in an earlier period, end
rebalancing in a later period, and execute contracts in TAS (each
``an Extended Rebalance Period'' and collectively ``the Extended
Rebalance Period'') while remaining below the 10% cap during any 15-
minute period of continuous market trading. See Amendment No. 1,
supra note 3, at 11-12, n.10. The Funds will be allocated executions
based on their percentage of notional transaction volume required.
See id. at 12.
    \23\ See Amendment No. 3, supra note 3, at 5.
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III. Discussion and Commission Findings

    The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange.\24\ The
Commission therefore approves the proposed rule change, as modified by
Amendment Nos. 1 and 3.
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    \24\ In approving this proposed rule change, the Commission has
considered the proposed rule change's impact on efficiency,
competition, and capital formation. See 15 U.S.C. 78c(f).
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    The Commission received a number of comments letters addressing the
proposed rule change's consistency with the Act, specifically focusing
on (1) the potential for systemic risks; and (2) investor protection
concerns, in particular the potential risks posed to retail investors.
The Commission addresses each of these issues below. In addition, in
approving the listing and trading of the Shares, the Commission also
analyzes the proposal to ensure there is an appropriate regulatory
framework to support the listing and trading of the Shares. Finally,
the Commission addresses the procedural argument that the proposed rule
change has been deemed approved and is currently in effect.
    The record demonstrates the proposal is reasonably designed to
mitigate the market impact and investor protection concerns articulated
in the OIP and raised by commenters, and that the Exchange has
demonstrated that there is an appropriate regulatory framework to
support the listing and trading of the Shares. Therefore, the
Commission finds the proposal is consistent with the Act, in particular
Section 6(b)(5).

A. Rebalance Design and Market Impact Considerations

    Several of the commenters opposed to the proposal discuss the
events of February 2018 as an example of the potential harm to retail
investors and the potential systemic risk posed by volatility-linked
exchange-traded products.\25\ One commenter summarizes:
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    \25\ See letters from Americans for Financial Reform Education
Fund, dated May 7, 2021 (``AFREF''); Dennis M. Kelleher, President
and CEO; Stephen Hall, Legal Director and Securities Specialist; and
Jason Grimes, Senior Counsel, Better Markets, Inc., dated May 7,
2021 (``Better Markets''); Tyler Gellasch, Executive Director,
Healthy Markets Association, dated May 7, 2021 (``Healthy
Markets''); and Robert Rutkowski, dated May 10, 2021
(``Rutkowski'').
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    On February 5, 2018, after years of low market volatility, and
accordingly a low VIX, the VIX doubled, a market event popularly known
as ``Volmageddon.'' One inverted VIX exchange-traded product (``ETP''),
known as the VelocityShares Daily Inverse VIX Short-Term note
(``XIV''), shrunk ``from $1.9 billion in assets to $63 million in one
session.'' \26\
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    \26\ Better Markets at 2.
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    The commenter further states that the nature of VIX ETPs
``contributed directly to the market volatility'' because these types
of products must rebalance in order to ensure the appropriate exposure
to the index.\27\ Two commenters describe the rebalance as a ``feedback
loop,'' because the issuer would have to purchase additional futures
that would result in further declines for an inverse product.\28\
According to one of the commenters, this feedback loop led to ``all
sorts of additional knock-effects for other market participants,''
including declines in major market indexes and investor losses in
XIV.\29\ A commenter states that each of the products proposed
``involves the sort of rebalancing that exacerbated volatility during
Volmageddon.'' \30\
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    \27\ See Better Markets at 2.
    \28\ See Better Markets at 3 (citing Patrick Augustin, et al.,
Volmaggedon and the Failure of Short Volatility Products (Apr. 6,
2021, Financial Analysts Journal, Forthcoming)); and AFREF at 3.
    \29\ AFREF at 3-4.
    \30\ Better Markets at 3.
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    The Sponsor also acknowledges that ``[p]ast and existing VIX ETPs
rebalance or roll their futures contracts according to a methodology
linked to the VIX futures' settlement each day.'' \31\ Further,
according to the Sponsor, daily settlement ``has resulted in funds
competing to execute their daily rebalance at a single point in time''
resulting in ``concentrated activity [that] erodes returns and may have
contributed to at least one major market disruption.'' \32\ It
describes previous attempts to reduce this concentration by reducing
the leverage of other existing inverse and leveraged VIX ETPs as having
``slowed the progression of market crowding,'' but concludes that these
deleveraged products can still require ``larger and larger rebalances
at the same crowded settlement time'' if they attract larger
inflows.\33\
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    \31\ Letter from Barry I. Pershkow, Partner, Chapman and Cutler
LLP, on behalf of the Sponsor, dated May 7, 2021 (``Volatility
Shares 1'') at 2.
    \32\ Volatility Shares 1 at 2.
    \33\ See Volatility Shares 1 at 2.
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    The Sponsor further states that commenters arguing in favor of
disapproval because of the failure of other VIX ETPs ``miss a key
point: lessons learned from the failures of previous products are at
the very heart of the new methodology underlying [the proposed
products].'' \34\ The Sponsor describes four ways the proposed products
differ from previous and existing VIX ETPs: (1) The valuation is an
average price over a longer time period instead of exclusively at the
4:00 p.m. ET settlement price; (2) a wider rebalancing period should
distribute trading volume away from 4:00 p.m. ET, resulting in a more
stable market; (3) the rebalance period may be extended to reduce
market impact if required; and (4) the Sponsor has committed to a 10%
participation cap for all VIX ETPs offered by the Sponsor.\35\ The
Sponsor states these differences should result in ``an execution method
that minimizes market impact and meaningfully lowers the chances of
either [proposed product] experiencing a significant disruption'' \36\
and ``less volatile products with minimal impacts to the underlying VIX
futures and the broader market.'' \37\
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    \34\ See letter from Stuart Barton, Chief Investment Officer,
Sponsor, dated May 19, 2021 (``Volatility Shares 2'') at 2.
    \35\ Volatility Shares 1 at 3.
    \36\ Volatility Shares 1 at 3.
    \37\ Volatility Shares 2 at 2.
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    Other commenters write in favor of the Fund's rebalance design.\38\
One commenter states that the ``structural changes . . . incorporated
into the

design of the [Fund] address critical shortcomings of prior short VIX
products.'' \39\ One commenter states that, ``although rebalancing
flows from leveraged and inverse VIX products are usually absorbed in
an orderly fashion . . . [there is] a potential benefit from
distributing rebalancing flows more evenly across the trading day
instead concentrating the flows around the time of the daily
settlement.'' \40\ Another commenter asserts that the design of the
product would ``help insure the orderly rebalancing of this product,
enhancing price discovery and liquidity of the VIX futures markets.''
\41\ A commenter also states that the rebalance design and the
participation cap dilute key information that encourages front running,
liquidity withholding and other manipulative strategies, which
substantially reduces the potential for fraudulent and manipulative
acts and practices, and further states that the architecture of the
Fund is a model for how all leveraged ETPs should be constructed.\42\
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    \38\ See letters from Soeren Bundgaard Broegger, Copenhagen
Business School, dated January 1, 2021 (``Broegger''); Vance
Harwood, President, Six Figure Investing, Advisory Board, Invest in
Vol, dated January 4, 2021 (``Harwood''); Jim Carroll, dated January
7, 2021 (``Caroll''); and Peter Corrigan, dated January 7, 2021
(``Corrigan'').
    \39\ Carroll.
    \40\ See Broegger.
    \41\ See Corrigan.
    \42\ See Harwood, at 1.
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    In its proposal, as modified by Amendment Nos. 1 and 3, the
Exchange states that the Sponsor's proposed methodology for the Funds
seeks to reduce the dependence of VIX ETPs on TAS by seeking to execute
part of the Funds' daily rebalance outside of TAS and believes that
this approach will spread VIX futures trading activity over a longer
period of time each day and should help to reduce market impact during
periods of market turmoil or disruption.\43\ In addition, the Exchange
states that the Sponsor expects that allowing the Funds to participate
in an Extended Rebalance Period will minimize the impact of the Funds'
rebalance on the price of VIX Futures Contracts, and particularly
minimize any impact of large rebalances during periods of market
illiquidity.\44\ The Exchange further states that ``the rebalancing
mechanism to be used by the Funds is designed to reduce the Funds'
individual and collective impact on the volatility market and the
associated potentially negative impact on the Funds.'' \45\
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    \43\ See Amendment No. 1, supra note 3, at 12-13.
    \44\ See id.
    \45\ Letter from Kyle Murray, Vice President, Associate General
Counsel, Cboe Global Markets, dated May 7, 2021 (``BZX Letter'') at
2.
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    In its assessment of the proposal, the Commission considered the
potential for market disruption during periods with large percentage
increases in volatility and, because of the potential for large, sudden
moves in VIX levels, the potential for large spikes in rebalancing
demand for VIX ETPs. As commenters note, the events of February 2018
occurred during a period when volatility had been relatively low and
spiked, as the spot price of VIX more than doubled, and there was a
large spike in the trading volume in VIX futures contracts at the end
of day. A portion of the volume was attributable to the rebalancing
demand of volatility-linked ETPs.
    In the OIP, the Commission requested comment on the Fund's
operation during periods with large percentage increases in volatility
and whether the Sponsor's proposed limitation on the use of VIX Futures
Contracts during its rebalance would sufficiently minimize the market
impact of the Fund's daily rebalance.\46\ Following the OIP, the
Exchange amended its proposal to state that the Sponsor will seek to
minimize the market impact of rebalances across all Funds on the price
of VIX Futures Contracts by limiting the Funds' participation, on any
given day, in VIX Futures Contracts to no more than ten percent of the
VIX Futures Contracts traded on CFE during any Rebalance Period.\47\
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    \46\ See OIP, supra note 3, 85 FR at 82538. As originally
proposed, the Sponsor would have sought to minimize the market
impact of Fund rebalances on the price of VIX Futures Contracts by
limiting the Fund's participation, on any given day, in VIX Futures
Contracts to no more than one-quarter of the contracts traded on the
CFE during any rebalance period (defined by the Index methodology as
3:45 p.m. to 4:00 p.m. ET.). See Notice, supra note 3, 85 FR 59836
at 59839.
    \47\ See Amendment No. 1, supra note 3, at 11.
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    The Exchange's proposal regarding the rebalancing methodology of
the Fund serves as an appropriate limit on the Fund's participation in
the VIX futures market, and is reasonably designed to help mitigate the
potential market impact on the Fund's daily rebalance demand during
periods when there are large percentage increases in volatility.\48\ In
discussing the events of ``Volmageddon,'' commenters describe several
factors that may have contributed to the spike in futures prices: (1)
Growing assets under management (``AUM'') for VIX ETPs, which in turn
required more rebalancing; (2) a large percentage increase in
volatility; and (3) a market where multiple funds were attempting to
rebalance simultaneously, and where the VIX futures TAS market was
halted ``limit up.'' \49\ The design of the rebalancing methodology
helps to mitigate the first and third factors, even if there is a large
percentage increase in volatility. Because the Funds' must limit their
participation in any Rebalance Period to 10%, the participation cap
still serves as a limit on the Funds' rebalancing demand during each
Rebalance Period, regardless of AUM. Further, the Funds' rebalance is
spread over a longer time period and distributes trading away from a
single point in time when other funds may be rebalancing,\50\ and
permits the Funds' limited flexibility in order to reduce market
impact, which may help reduce market crowding. In addition, the
Commission observes that the VIX futures market has changed since the
events of ``Volmageddon:'' (1) TAS has a wider permissible price range;
\51\ and (2) VIX futures settle at 4:00 p.m. ET rather than 4:15 p.m.
ET (i.e., after the close of U.S. equity market trading).\52\
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    \48\ A commenter states that the Commission should not view
individual product proposals in isolation. See Better Markets at 6.
Although the Commission's findings in this order are based on the
specific proposed rule change filed with the Commission, including
how the proposed rule operates under the current market conditions
discussed in this order, the Commission recognizes that, over time,
market conditions in VIX ETP markets, and the related VIX futures
market, may change.
    \49\ See letter from Stuart Barton, Head of Investments,
Sponsor, dated January 6, 2021, at n. 1.
    \50\ For example, two existing leveraged VIX ETPs target a 4
p.m. ET benchmark. See Securities Exchange Act Release No. 90691
(Dec. 16, 2020), 85 FR 83643 (Dec. 22, 2020) (SR-CboeBZX-2020-093).
    \51\ See Cboe Product Update, ``Price Parameter Change for TAS
Transactions in VX Futures,'' 2018, available at: https://cdn.cboe.com/resources/product_update/2018/VX-Trade-at-Settlement-VXT-Price-Parameter-Change.pdf.
    \52\ See Cboe Futures Exchange, LLC Rule Certification,
Submission Number CFE-2020-028 (September 23, 2020), available at:
https://cdn.cboe.com/resources/regulation/rule_filings/pending/2020/
20-028-Daily-Settlement-Determination-
Time.pdf#:~:text=The%20Daily%20Settlement%20Time%20for%20VX%20futures
%20is,for%20VX%20futures%20is%203%3A00%20p.m.%20Chicago%20time.
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    In sum, the Commission considered the potential that VIX ETPs might
have a destabilizing effect on markets during times of market stress.
Based on the record, including commenters' descriptions of the events
of February 2018, the Commission concludes that the Exchange's proposal
is reasonably designed to help mitigate against the market impact
concerns articulated in the OIP and by commenters opposed to the
proposal. The rebalance design of the Funds may help distribute
rebalancing volume. Further, the 10% participation cap strikes an
appropriate balance between allowing the Funds to rebalance within a
reasonably short period of time and managing the potential market
impact of a large rebalance. Therefore, the Commission finds that the
proposal is consistent with Section 6(b)(5) of the Act,

including the protection of investors and the public interest.

B. Investor Protection

    Commenters also raise concerns about the risks and complexity of
leveraged and inverse VIX ETPs and their suitability for retail
investors. One of the commenters asserts that: (1) Recent market events
and the public record with the VIX raise significant questions about
the investor-protection risks posed by VIX-related investment products;
(2) such questions must be adequately addressed by filings to list and
trade more VIX-related products; and (3) the Exchange has not explained
how explain how its proposed listing and trading of the Shares would be
consistent with the Act, including the protection of investors.\53\
Another commenter states that the absence of new sales practices
protections for leveraged investment products ``leaves investors with
extremely inadequate protections in this space.'' \54\ According to the
commenter, shares of leveraged exchange-traded funds are unsuitable for
retail investors because they provide markedly different returns--and
generally significantly underperform--their underlying indices over the
long-term.\55\ That commenter also asserts that it would be
inconsistent with the protection of investors to facilitate gambling-
like market practices by approving additional products that enable
leveraged bets on synthetic indexes.\56\ More specifically, the
commenter states that the Shares would not directly support economic
activity and, in the commenter's view, the assertion that any hedging
achieved through the Shares would lead to a net gain in real capital
formation is not supported.\57\ Commenters also state that the products
are inconsistent with the Act because there are ``inherent dangers''
for leveraged exchange-traded products that make them unsuitable for
retail investors.\58\ Finally, one commenter states that the Approval
Order does not adequately address the risks to investors and to retail
investors in particular.\59\
---------------------------------------------------------------------------

    \53\ See Healthy Markets at 6.
    \54\ AFREF at 1-2.
    \55\ See AFREF at 2. Another commenter asserts that certain
investors purchasing shares of the Long Fund may ``be surprised to
see that their losses would be amplified by a factor of 2 during
periods of low volatility'' and, in the view of this commenter, both
products raise investor protection concerns because they are
``complex and risky.'' See Better Markets at 4-5.
    \56\ See AFREF at 2.
    \57\ See AFREF at 3.
    \58\ See Rutkowski, Healthy Markets at 2-3.
    \59\ See Better Markets at 4-5.
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    Several commenters urge the Commission to approve the Fund and
assert that it would meet an unmet need in the market for certain
investors. \60\ Commenters state that certain investors replicate the
inverse VIX strategy by shorting other VIX-related ETPs, which,
according to commenters, may result in greater risks and higher costs
for such investors.\61\ One commenter asserts that ``the Fund provides
a more predictable investment that has lower complexity and a better-
defined risk profile.'' \62\
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    \60\ See letters from Jay Soloff, Lead Options Analyst,
Investors Alley, dated December 30, 2020 (``Soloff''); Russell
Rhoads, Head of Research and Consulting, EQDerivatives, dated
January 14, 2021 (``Rhoads''); Invest in Vol, dated January 6, 2021
(``Invest in Vol''); Carroll; Harwood at 2.
    \61\ See Carroll (stating investors may be ``better served''
with direct exposure rather than short sales); Harwood; Invest in
Vol, at 2; and Soloff. See also Rhoads (stating the absence of a
short VIX ETP excludes certain investors from opportunities afforded
to hedge fund investors).
    \62\ Harwood. However, a commenter on the Long Fund questions
the profitability and utility of a 2x long product. See Long VIX
Approval, supra note 21, at n.50, n. 53 and accompanying text.
---------------------------------------------------------------------------

    In response to commenters opposed to the proposal, the Sponsor
states that commenters' concerns related to leveraged and inverse
exchange-traded products, and in particular the concern that such
products underperform their benchmarks over time, have been raised
previously. It states that such products are not designed to perform
over long periods of time, and that courts have ``affirmed the adequacy
of the disclosure contained in the registration statement of these
products.'' \63\ In addition, the Exchange states that the proposed
products would provide ``investors with new tools to implement
investment strategies to which they might not otherwise have access.''
\64\ The Sponsor also cites the Commission's recent amendments to Rule
6c-11 of the Investment Company Act of 1940, which would include
certain leveraged and inverse exchange-traded funds within the scope of
Rule 6c-11, as well as the Commission's approvals of leveraged and
inverse exchange-traded products that are not registered investment
companies.\65\ The Sponsor asserts that this demonstrates that
questions related to leveraged and inverse products have been therefore
``asked and answered.'' \66\
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    \63\ Volatility Shares 2 at 1-2.
    \64\ BZX Letter at 2. The Exchange states that the Funds would
provide greater short and long exposure than ETPs currently trading
on U.S. exchanges. See id.
    \65\ See Volatility Shares 2 at 1-2.
    \66\ Volatility Shares 2 at 1-2.
---------------------------------------------------------------------------

    The Commission acknowledges commenters' concerns, but believes this
proposed rule change is consistent with the protection of investors.
Commenters assert that the Exchange has not met its burden to
demonstrate the proposal is consistent with the protection of investors
because leveraged and inverse exchange-traded products, in particular
those linked to volatility, are complex and risky, and underperform
their benchmarks over time. The Commission has recognized that certain
complex products, such as inverse or leveraged exchange-traded
products, ``which may be useful for some sophisticated trading
strategies, are highly complex financial instruments and are typically
designed to achieve their stated objectives on a daily basis.'' \67\
However, there are existing rules and standards of conduct applicable
to other complex products that would apply to listing and trading of
the Shares. The best interest standard of conduct for broker-dealers
required under Regulation Best Interest and the fiduciary obligations
of investment advisers discussed in the Fiduciary Interpretation
thereto apply to transactions in all exchange-traded products where the
transaction is recommended by a broker-dealer or pursuant to the advice
of an investment adviser.\68\ In addition, the Financial Industry
Regulatory Authority (``FINRA'') has implemented increased sales
practice and customer margin requirements for FINRA members applicable
to inverse, leveraged and inverse leveraged securities (which include
the Shares), and has provided specific guidance regarding sales
practice obligations for volatility-linked exchange-traded
products.\69\ Exchange members that carry customer accounts will be
required to follow the FINRA guidance set forth in these notices. The
Exchange also has rules relating to suitability, in particular BZX Rule
3.7.\70\

Therefore, the Commission finds that this proposal is consistent with
the Act, in particular the protection of investors and the public
interest.\71\
---------------------------------------------------------------------------

    \67\ Regulation Best Interest Adopting Release, Exchange Act
Rel. No. 86031 (Jun. 5, 2019), 84 FR 33318 (Jul. 12, 2019), at
33376.
    \68\ See Investment Company Act Rel. No. 34084, (Nov. 2, 2020),
85 FR 83217 (Dec. 21, 2020), at 83217-18 (discussing the best
interest standard of conduct for broker-dealers and the fiduciary
obligations of investment advisers in the context of all exchange-
traded products).
    \69\ See FINRA Regulatory Notices 09-31 (Jun. 2009), 09-53 (Aug.
2009), 09-65 (Nov. 2009), 12-03 (Jan. 2012), and 17-32 (Oct. 2017).
    \70\ In particular, Rule 3.7 imposes suitability obligations on
Exchange members with respect to recommending transactions in the
Shares to customers and Interpretation and Policy .01 of BZX Rule
3.7 imposes a duty of due diligence on Exchange members to learn the
essential facts relating to every customer prior to trading the
Shares, and specifically provides that ``[n]o Member shall recommend
to a customer a transaction in any such product unless the Member
has a reasonable basis for believing at the time of making the
recommendation that the customer has such knowledge and experience
in financial matters that he may reasonably be expected to be
capable of evaluating the risks of the recommended transaction and
is financially able to bear the risks of the recommended position.''
    \71\ Although the Commission finds the proposal is consistent
with the Exchange Act, the Commission is not expressing a view about
whether the Shares are appropriate or suitable for all investors.
---------------------------------------------------------------------------

C. Other Considerations

    In addition, the Commission analyzed other aspects of the
Exchange's proposal and finds, as explained below, that the proposal is
consistent with the Act because it is designed to prevent fraudulent
and manipulative acts and practices and protect investors and the
public interest. The Exchange has demonstrated there is an appropriate
regulatory framework to support listing and trading of the Shares,
including trading rules, surveillance, and listing standards.
    The proposal is reasonably designed to promote fair disclosure of
information that may be necessary to price the Shares appropriately and
to prevent trading in the Shares when a reasonable degree of certain
pricing transparency cannot be assured. Specifically, the Exchange will
obtain a representation from the Sponsor of the Shares that the NAV
will be calculated daily and that the NAV and the Fund's holdings will
be made available to all market participants at the same time. On each
Business Day,\72\ before commencement of trading in Shares during
Regular Trading Hours,\73\ the Fund will disclose on its website the
holdings that will form the basis for the Fund's calculation of NAV at
the end of the Business Day. This website disclosure of the portfolio
composition of the Fund will occur at the same time as the disclosure
by the Fund of the portfolio composition to authorized participants, so
that all market participants will be provided portfolio composition
information at the same time, and the same portfolio information will
be provided on the public website as in electronic files provided to
authorized participants. Quotation and last-sale information regarding
the Shares will be disseminated through the facilities of the
Consolidated Tape Association. As required by BZX Rule 14.11(f)(4), an
updated Intraday Indicative Value (``IIV'') will be calculated and
widely disseminated by one or more major market data vendors every 15
seconds throughout Regular Trading Hours. The IIV will be published on
the Exchange's website and will be available through on-line
information services such as Bloomberg and Reuters. 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. The Fund's
website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative
information. In addition, the level of the Index will be published at
least every 15 seconds in real time from 9:30 a.m. to 4:00 p.m. ET and
at the close of trading on each Business Day by Bloomberg and Reuters.
---------------------------------------------------------------------------

    \72\ A ``Business Day'' means any day other than a day when any
of BZX, Cboe, CFE or other exchange material to the valuation or
operation of the Fund, or the calculation of the VIX, options
contracts underlying the VIX, VIX Futures Contracts or the Index is
closed for regular trading.
    \73\ As defined in BZX Rule 1.5(w), the term ``Regular Trading
Hours'' means the time between 9:30 a.m. and 4:00 p.m. ET.
---------------------------------------------------------------------------

    Quotation and last-sale information regarding VIX Futures Contracts
and VIX Options Contracts will be available from the exchanges on which
such instruments are traded. Quotation and last-sale information
relating to VIX Options Contracts will also be available via the
Options Price Reporting Authority. Quotation and last-sale information
for VIX Swap Agreements will be available from nationally recognized
data services providers, such as Reuters and Bloomberg, through
subscription agreements or from a broker-dealer who makes markets in
such instruments. Pricing information regarding Cash Equivalents in
which the Fund may invest is generally available through nationally
recognized data services providers, such as Reuters and Bloomberg,
through subscription agreements. The closing prices and settlement
prices of the Index Components (i.e., the first- and second-month VIX
Futures Contracts) will be readily available from the websites of CFE
(http://www.cfe.cboe.com), automated quotation systems, published or
other public sources, or on-line information services such as Bloomberg
or Reuters. The CFE also provides delayed futures information on
current and past trading sessions and market news free of charge on its
website. Complete real-time data for component VIX Futures Contracts
underlying the Index, including the specific contract specifications of
Index Components (i.e., first-month and second-month VIX Futures
Contracts), is available by subscription from Reuters and Bloomberg.
    The Exchange's rules regarding trading halts further help to ensure
the maintenance of fair and orderly markets for the Shares, which is
consistent with the protection of investors and the public interest.
Trading in the Shares 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 securities and/or the financial instruments composing
the daily disclosed portfolio of the Fund; or (2) whether other unusual
conditions or circumstances detrimental to the maintenance of a fair
and orderly market are present. In addition, the Exchange will halt
trading in the Shares under the conditions specified in BZX Rule 11.18
(Trading Halts Due to Extraordinary Market Volatility). BZX Rule
14.11(f)(4)(c)(ii) enumerates additional circumstances under which the
Exchange will consider the suspension of trading in and will commence
delisting proceedings for the Shares.
    The Exchange's proposal is designed to safeguard material non-
public information relating to the Fund's portfolio. Specifically, as
the Exchange states, the Sponsor is not a broker-dealer or affiliated
with a broker-dealer. In the event that (a) the Sponsor becomes a
broker-dealer or newly affiliated with a broker-dealer, or (b) any new
sponsor is a broker-dealer or becomes affiliated with a broker-dealer,
it will implement and maintain a fire wall with respect to its relevant
personnel or such broker-dealer affiliate, as applicable, regarding
access to information concerning the composition of and/or changes to
the portfolio, and will be subject to procedures designed to prevent
the use and dissemination of material non-public information regarding
the portfolio. Moreover, trading of the Shares will be subject to BZX
Rule 14.11(f)(4)(D), which sets forth certain restrictions on Exchange
members acting as registered Market Makers \74\ in Trust Issued
Receipts to facilitate surveillance. In addition, the Exchange has a
general policy prohibiting the distribution of material, non-public
information by its employees.
---------------------------------------------------------------------------

    \74\ As defined in BZX Rule 1.5(l), the term ``Market Maker''
means an Exchange member that acts as a Market Maker pursuant to
Chapter XI of the BZX Rules.
---------------------------------------------------------------------------

    Furthermore, the Exchange or FINRA, on behalf of the Exchange, or
both, will communicate and may obtain information regarding trading in
the Shares and the underlying listed instruments, including listed
derivatives held by the Fund, with the Intermarket Surveillance Group
(``ISG''), other markets or entities who are members or affiliates of
the ISG, or with which the

Exchange has entered into a comprehensive surveillance sharing
agreement. The trading of the Shares through the Exchange will be
subject to the Exchange's surveillance procedures for derivative
products, and these procedures are adequate to properly monitor
Exchange trading of the Shares during all trading sessions and to deter
and detect violations of Exchange rules and applicable federal
securities laws. In addition, all of the VIX Futures Contracts and VIX
Options Contracts held by the Fund will trade on markets that are a
member of ISG or affiliated with a member of ISG or with which the
Exchange has in place a comprehensive surveillance sharing agreement.
    Moreover, the trading of the Shares on the Exchange will be subject
to the Exchange's and other rules listed below. Specifically:
    (1) 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;
    (2) The Shares will conform to the initial and continued listing
criteria under BZX Rule 14.11(f);
    (3) Pursuant to BZX Rule 14.11(a), all statements and
representations made in the filing regarding the Index composition,
description of the portfolio or reference assets, limitations on
portfolio holdings or reference assets, dissemination and availability
of the Index, reference assets, and IIV, or the applicability of
Exchange listing rules specified in the filing shall constitute
continued listing requirements for the Shares. The issuer will advise
the Exchange of any failure by the Fund to comply with the continued
listing requirements, and, pursuant to its obligations under Section
19(g)(1) of the Act, the Exchange will surveil for compliance with the
continued listing requirements. If the Fund or the Shares are not in
compliance with the applicable listing requirements, the Exchange will
commence delisting procedures under Exchange Rule 14.12.
    (4) The Exchange has the appropriate rules to facilitate
transactions in the Shares during all trading sessions;
    (5) Prior to the commencement of trading, the Exchange will inform
its members in an Information Circular of the special characteristics
and risks associated with trading the Shares; \75\
---------------------------------------------------------------------------

    \75\ The Exchange states that the Information Circular will
discuss the following: (a) The procedures for purchases and
redemptions of Shares in Creation Units (and that Shares are not
individually redeemable); (b) BZX Rule 3.7, which imposes
suitability obligations on Exchange members with respect to
recommending transactions in the Shares to customers; (c)
Interpretation and Policy .01 of BZX Rule 3.7 which imposes a duty
of due diligence on its members to learn the essential facts
relating to every customer prior to trading the Shares, and
specifically provides that ``[n]o Member shall recommend to a
customer a transaction in any such product unless the Member has a
reasonable basis for believing at the time of making the
recommendation that the customer has such knowledge and experience
in financial matters that he may reasonably be expected to be
capable of evaluating the risks of the recommended transaction and
is financially able to bear the risks of the recommended position;''
(d) how information regarding the IIV and the Fund's holdings is
disseminated; (e) the risks involved in trading the Shares during
the Pre-Opening and After Hours Trading Sessions (as such terms are
defined in BZX Rules) when an updated IIV will not be calculated or
publicly disseminated; (f) the requirement that Exchange members
deliver a prospectus to investors purchasing newly issued Shares
prior to or concurrently with the confirmation of a transaction; and
(g) trading information.
---------------------------------------------------------------------------

    (6) FINRA has implemented increased sales practice and customer
margin requirements for FINRA members applicable to inverse, leveraged
and inverse leveraged securities (which include the Shares) and options
on such securities, as described in FINRA Regulatory Notices 09-31
(June 2009), 09-53 (August 2009), and 09-65 (November 2009). Exchange
members that carry customer accounts will be required to follow the
FINRA guidance set forth in these notices;
    (7) For initial and continued listing, the Fund and the Trust must
be in compliance with Rule 10A-3 under the Act; \76\ and
---------------------------------------------------------------------------

    \76\ 17 CFR 240.10A-3.
---------------------------------------------------------------------------

    (8) A minimum of 100,000 Shares of the Fund will be outstanding at
the commencement of trading on the Exchange.

D. Procedural Considerations

    The Sponsor also asserts that the proposed rule change has been
deemed approved pursuant to Exchange Act Section 19(b)(2)(D)(ii).\77\
The Commission disagrees with the Sponsor's assertions that: (1)
Because the Approval Order is stayed, ``the Commission did not
effectively approve or disapprove [the Proposal] by the 240th day'' and
therefore the proposal has been deemed approved; \78\ and (2) the
Commission's discretionary review of the order by delegated authority
conflicts with the purpose and language of the statute.\79\
---------------------------------------------------------------------------

    \77\ See Volatility Shares 1 at 4. Section 19(b) of the Exchange
Act requires the Commission to ``issue an order'' approving or
disapproving a proposed rule change within, at most, 240 days of the
proposed rule change's filing. See 15 U.S.C. 78s(b)(2)(B)(ii). If
the Commission fails to issue an order within that period, the
proposed rule change is deemed to have been approved. See 15 U.S.C.
78s(b)(2)(D).
    \78\ See Volatility Shares 1 at 4. The Sponsor asserts that,
because the Commission did not act on SR-CboeBZX-2020-070 before May
21, 2021, the proposal has been deemed approved.
    \79\ See Volatility Shares 1 at 2.
---------------------------------------------------------------------------

    The Commission complied with the requirements of the statute.
Section 19(b)(2)(D) requires only that the Commission ``issue an
order'' approving or disapproving the proposed rule change within 240
days. The Approval Order was issued within that period.
    Although orders issued by delegated authority are issued by
Commission staff, they are issued with the full authority of the
Commission and are signed by the Secretary's office on behalf of the
Commission. Section 4A of the Exchange Act authorizes the Commission to
delegate certain functions--including approval or disapproval of
proposed rule changes under Section 19--to a ``division of the
Commission.'' \80\ And the Commission's Rules of Practice make clear
that ``an action made pursuant to delegated authority shall have
immediate effect and be deemed the action of the Commission.'' \81\
---------------------------------------------------------------------------

    \80\ 15 U.S.C. 78d-1(a).
    \81\ Commission Rule of Practice 431(e), 17 CFR 201.431(e). See
also, e.g., Rule of Practice 430(c), 17 CFR 201.430(c) (referring to
``a final order entered pursuant to [delegated authority]''); Rule
of Practice 431(f), 17 CFR 201.431(f) (giving an order by delegated
authority operative effect, even when review has been sought, until
a person receives actual notice that it was been stayed, modified,
or reversed on review). Moreover, as the Commission has previously
explained, Congress was aware of the Commission's ability to
delegate authority to approve SRO rule filings when the time
restrictions in Exchange Act Section 19(b)(2)(D) were enacted. And
to construe Section 19(b)(2), as the Sponsor does, to require
Commission review of an order by delegated authority to be completed
within 240 days ``would undermine both the specific deadlines set
forth in the statute and the Commission's ability to delegate
functions. Nor is such a construction necessary to fulfill
Congress's purpose in enacting the deadlines to ``streamline'' the
rule filing process. With rare exception, rule filings are decided,
by delegated authority or otherwise, within 240 days. See Securities
Exchange Act Release Nos. 88493 (Mar. 27, 2020), 85 FR 18617 (Apr.
2, 2020) (Order Affirming Action by Delegated Authority and
Disapproving Proposed Rule Changes Related to Connectivity and Port
Fee in the Matter BOX Exchange LLC) at 18626; and 82727 (Feb. 15,
2018), 83 FR 7793 (Feb. 22, 2017) (Order Setting Aside Action by
Delegated Authority and Disapproving a Proposed Rule Change, as
Modified by Amendment Nos. 1 and 2, Regarding the Acquisition of CHX
Holdings, Inc. by North America Casin Holdings, Inc.) at 7799.
---------------------------------------------------------------------------

IV. Conclusion

    For the foregoing reasons, the Commission finds that the proposed
rule change is consistent with the Act and the rules and regulations
thereunder applicable to a national securities exchange.
    It is therefore ordered, pursuant to Rule 431 of the Commission's
Rules of Practice, that the earlier action taken by delegated
authority, Securities Exchange

Act Release No. 91264 (March 5, 2021), 86 FR 13939 (March 11, 2021), is
set aside and, pursuant to Section 19(b)(2) of the Act, the proposed
rule change (SR-CboeBZX-2020-070), as modified by Amendment Nos. 1 and
3, hereby is approved.

    By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-21877 Filed 10-6-21; 8:45 am]
BILLING CODE 8011-01-P