[Federal Register Volume 76, Number 6 (Monday, January 10, 2011)]
[Notices]
[Pages 1477-1487]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-162]
[[Page 1477]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63636; File No. SR-NYSEArca-2010-121]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Proposed Rule Change Relating to the Listing and Trading of
FactorShares Funds
January 3, 2011.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that, on December 22, 2010, NYSE Arca, Inc. (``Exchange'' or ``NYSE
Arca'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') the proposed rule change as described in
Items I and II below, which Items have been prepared by the Exchange.
The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to list and trade shares of the following
pursuant to NYSE Arca Equities Rule 8.200: FactorShares 2X: S&P500
Bull/TBond Bear; FactorShares 2X: TBond Bull/S&P500 Bear; FactorShares
2X: S&P500 Bull/USD Bear; FactorShares 2X: Oil Bull/S&P500 Bear; and
FactorShares 2X: Gold Bull/S&P500 Bear. The text of the proposed rule
change is available at the Exchange, the Commission's Public Reference
Room, and http://www.nyse.com.
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
NYSE Arca Equities Rule 8.200, Commentary .02, permits the trading
of Trust Issued Receipts (``TIRs'') either by listing or pursuant to
unlisted trading privileges (``UTP'').\3\ The Exchange proposes to list
and trade the shares of the following pursuant to NYSE Arca Equities
Rule 8.200: FactorShares 2X: S&P500 Bull/TBond Bear; FactorShares 2X:
TBond Bull/S&P500 Bear; FactorShares 2X: S&P500 Bull/USD Bear;
FactorShares 2X: Oil Bull/S&P500 Bear; and FactorShares 2X: Gold Bull/
S&P500 Bear (each a ``Fund'' and, collectively, the ``Funds'').\4\ All
Funds except for the FactorShares 2X: TBond Bull/S&P500 Bear are also
referred to as ``Leveraged Funds,'' and FactorShares 2X: TBond Bull/
S&P500 Bear is referred to as the ``Leveraged Inverse Fund.'' \5\
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\3\ Commentary .02 to NYSE Arca Equities Rule 8.200 applies to
TIRs that invest in ``Financial Instruments.'' The term ``Financial
Instruments,'' as defined in Commentary .02(b)(4) to NYSE Arca
Equities Rule 8.200, means any combination of investments, including
cash; securities; options on securities and indices; futures
contracts; options on futures contracts; forward contracts; equity
caps, collars and floors; and swap agreements.
\4\ See Pre-Effective Amendment No. 3 to Form S-1, dated
November 3, 2010, for each Fund (individually, a ``Registration
Statement,'' and, collectively, the ``Registration Statements'')
(File Nos. 333-164754, 333-164758, 333-164757, 333-164756 and 333-
164755, respectively). The description of the Funds and the Shares
contained herein are based on the Registration Statements.
\5\ Terms relating to the Funds and the Indexes referred to, but
not defined, herein are defined in the common Prospectus within the
Registration Statements.
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The Exchange notes that the Commission has previously approved the
listing and trading of other issues of TIRs on the American Stock
Exchange LLC (``Amex''),\6\ trading on NYSE Arca pursuant to UTP,\7\
and listing on NYSE Arca.\8\ In addition, the Commission has approved
other exchange-traded fund-like products linked to the performance of
underlying commodities.\9\
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\6\ See, e.g., Securities Exchange Act Release No. 58161 (July
15, 2008), 73 FR 42380 (July 21, 2008) (SR-Amex-2008-39) (order
approving amendments to Amex Rule 1202, Commentary .07, and listing
on Amex of 14 funds of the Commodities and Currency Trust).
\7\ See, e.g., Securities Exchange Act Release No. 58162 (July
15, 2008), 73 FR 42391 (July 21, 2008) (SR-NYSEArca-2008-73) (notice
of effectiveness of UTP trading on NYSE Arca of 14 funds of the
Commodities and Currency Trust).
\8\ See, e.g., Securities Exchange Act Release No. 58457
(September 3, 2008), 73 FR 52711 (September 10, 2008) (SR-NYSEArca-
2008-91) (order approving listing on NYSE Arca of 14 funds of the
Commodities and Currency Trust).
\9\ See, e.g., Securities Exchange Act Release Nos. 55585 (April
5, 2007), 72 FR 18500 (April 12, 2007) (SR-NYSE-2006-75) (approving
for NYSE listing the iShares GS Commodity Light Energy Indexed
Trust; iShares GS Commodity Industrial Metals Indexed Trust; iShares
GS Commodity Livestock Indexed Trust and iShares GS Commodity Non-
Energy Indexed Trust); 56932 (December 7, 2007), 72 FR 71178
(December 14, 2007) (SR-NYSEArca-2007-112) (order granting
accelerated approval to list iShares S&P GSCI Commodity-Indexed
Trust); and 59895 (May 8, 2009), 74 FR 22993 (May 15, 2009) (SR-
NYSEArca-2009-40) (order granting accelerated approval for NYSE Arca
listing the ETFS Gold Trust).
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Each of the Funds was formed on January 26, 2010 as a separate
Delaware statutory trust, and each Fund will issue and offer common
units of beneficial interest (``Shares''), which represent units of
fractional beneficial undivided interest in and ownership of such Fund.
Factor Capital Management, LLC, (``Managing Owner''), a Delaware
limited liability company, will serve as the Managing Owner of each
Fund. Interactive Brokers LLC, a Connecticut limited liability company,
will serve as each Fund's clearing broker (``Commodity Broker''). The
Commodity Broker is registered with the Commodity Futures Trading
Commission (``CFTC'') as a futures commission merchant and is a member
of the National Futures Association in such capacity. Each Fund has
appointed State Street Bank and Trust Company, (``State Street''), as
the Administrator, the Transfer Agent and the Custodian of each Fund.
Each Fund has appointed Foreside Fund Services, LLC as the
Distributor to assist the Managing Owner and the Funds with certain
functions and duties relating to distribution, compliance of sales and
marketing materials, and certain regulatory compliance matters. The
Distributor will not open or maintain customer accounts or handle
orders for any of the Funds.
Overview of the Standard & Poor's Factor Index Series (``Indexes'')
According to the Registration Statements, the Indexes are intended
to reflect the daily spreads, or the differences, in the relative
return, positive or negative, between the corresponding sub-indexes
constructed from futures contracts (``Index Futures Contracts'') of
each Index. Each Index is comprised of a long sub-index (``Long Sub-
Index'') and a short sub-index (``Short Sub-Index'') (individually, a
``Sub-Index'' and, collectively, the ``Sub-Indexes''). The Long Sub-
Index is composed of the long front Index Futures Contract (``Long
Index Futures Contract'').\10\ The Short Sub-Index is composed of the
short front Index Futures Contract (``Short Index Futures
[[Page 1478]]
Contract'').\11\ Each Index is calculated to reflect the corresponding
relative return, or spread, which is the difference in the daily
changes, positive or negative, between the value of the Long Sub-Index
and the value of the Short Sub-Index, plus the return on a risk free
component.
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\10\ The term ``long front'' refers to a long position in the
near month contract.
\11\ The term ``short front'' refers to a short position in the
near month contract.
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The objective of each Index is to track the daily price spreads, or
difference between the Sub-Indexes, and in turn, the underlying Index
Futures Contracts. Although each Index is calculated to reflect both an
excess return and a total return, each Fund tracks an Index that is
calculated to reflect a total return. Standard & Poor's Financial
Services LLC is the Index Sponsor for the Indexes and is the
calculation agent for the Indexes and Sub-Indexes.\12\
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\12\ Standard & Poor's Financial Services LLC is the Index
Sponsor with respect to the Indexes and is not affiliated with a
broker-dealer. The Index Sponsor has implemented procedures designed
to prevent the use and dissemination of material, non-public
information regarding the Indexes.
\13\ The Base Date for each Index is September 9, 1997 and each
Sub-Index Base Weight is 100%.
\14\ ``CME'' means the Chicago Mercantile Exchange, Inc. ``ICE''
means the Intercontinental Exchange, Inc. ``NYMEX'' means the New
York Mercantile Exchange. ``COMEX'' means the COMEX division of
NYMEX.
\15\ The S&P 500[supreg] Non-U.S. Dollar Index is calculated on
a Total Return basis.
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Each Index is intended to reflect the difference in the daily
return between two market segments. The Long Sub-Index tracks the
changes in the Long Index Futures Contract. The Short Sub-Index tracks
the changes in the Short Index Futures Contract.
The Sub-Indexes, Index Futures Contracts, trading hours of the
applicable Index Futures Contracts, and related information are set
forth in the chart below.
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Sub-indexes and
Index \13\ index futures Exchange \14\ (symbol) Contract months Trading hours
contracts (eastern time)
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S&P U.S. Equity Risk Premium Long Sub-Index: CME (ES).............. March, June, Monday-Thursday:
Total Return Index. S&P 500[supreg] September, 6 p.m.-4:15 p.m.
Futures Excess December. (next day) &
Return Index. 4:30 p.m.-5:30
Long Index p.m.; Sunday: 6
Futures p.m.-4:15 p.m.
Contract: E-mini (next day).
Standard and
Poor's 500 Stock
Price Index\TM\
Futures.
Short Sub-Index: CME (US).............. ................. Monday-Friday:
S&P 30-Year 8:20 a.m.-3 p.m.
Treasury Bond
Futures Excess
Return Index.
Short Index
Futures
Contract: 30-
Year U.S.
Treasury Bond
Futures.
S&P 500[supreg] Non-U.S. Dollar Long Sub-Index: CME (ES).............. March, June, Monday-Thursday:
Index.\15\ S&P 500[supreg] September, 6 p.m.-4:15 p.m.
Futures Excess December. (next day) &
Return Index. 4:30 p.m.-5:30
Long Index p.m.; Sunday: 6
Futures p.m.-4:15 p.m.
Contract: E-mini (next day).
Standard and
Poor's 500 Stock
Price Index\TM\
Futures.
Short Sub-Index: ICE (DX).............. ................. Monday-Friday: 8
S&P U.S. Dollar p.m.-6 p.m.
Futures Excess (next day)
Return Index. Sunday: 6 p.m.-6
Short Index p.m. (next day).
Futures
Contract: U.S.
Dollar
Index[supreg]
Futures.
S&P Crude Oil-Equity Spread Long Sub-Index: NYMEX (CL)............ Rolled pursuant Monday-Friday: 9
Total Return Index. S&P GSCI[supreg] to S&P a.m.-2:30 p.m.
Crude Oil Excess GSCI[supreg]
Return Index. schedule.
Long Index
Futures
Contracts: Light
Sweet Crude Oil
Futures.
Short Sub-Index: CME (ES).............. March, June, Monday-Thursday:
S&P 500[supreg] September, 6 p.m.-4:15 p.m.
Futures Excess December. (next day) &
Return Index. 4:30 p.m.-5:30
Short Index p.m.; Sunday: 6
Futures p.m.-4:15 p.m.
Contract: E-mini (next day).
Standard and
Poor's 500 Stock
Price Index\TM\
Futures.
S&P Gold-Equity Spread Total Long Sub-Index: COMEX (GC)............ Rolled pursuant Monday-Friday:
Return Index. S&P GSCI[supreg] to S&P 8:20 a.m.-1:30
Gold Excess GSCI[supreg] p.m.
Return Index. schedule.
Long Index
Futures
Contract: Gold
Futures.
Short Sub-Index: CME (ES).............. March, June, Monday-Thursday:
S&P 500[supreg] September, 6 p.m.-4:15 p.m.
Futures Excess December. (next day) &
Return Index. 4:30 p.m.-5:30
Short Index p.m.; Sunday: 6
Futures p.m.-4:15 p.m.
Contract: E-mini (next day).
Standard and
Poor's 500 Stock
Price Index\TM\
Futures.
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[[Page 1479]]
Operation of the Funds
According to the Registration Statements, the objective of each
Fund will be to reflect the spread, or the difference, in daily return,
on a leveraged basis, between two predetermined market segments. Each
Fund will represent a relative value or ``spread'' strategy seeking to
track the differences in daily returns between two futures-based Index
components (as discussed above under ``Overview of the Indexes''). By
simultaneously buying and selling two benchmark Index Futures Contracts
(or, as necessary, substantively equivalent combinations of Substitute
Futures and Financial Instruments),\16\ each Leveraged Fund and
Leveraged Inverse Fund will target a daily return equivalent to
approximately +200% and -200%, respectively, of the spread, or the
difference, in daily return between a long futures contract and a short
futures contract (before fees, expenses and interest income).
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\16\ According to the Registration Statements, the term
``Substitute Futures'' refers to futures contracts other than the
specific Index Futures Contracts that underlie the applicable Index
that the Managing Owner expects will tend to exhibit trading prices
or returns that generally correlate with an Index Futures Contract.
The term ``Financial Instruments'' refers to forward agreements and
swaps that the Managing Owner expects will tend to exhibit trading
prices or returns that generally correlate with an Index Futures
Contract. Shareholders may review a Fund's monthly Account Statement
that will be posted on the Fund's Web site at http://www.factorshares.net or a Fund's periodic reports on Form 10-Q and/
or Form 10-K as filed with the SEC at http://www.sec.gov for
additional information. In addition, investors will have access to
the current portfolio composition of the Funds through the Funds'
Web site, as described below.
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Each Fund will hold a portfolio of Index Futures Contracts, each of
which are traded on various futures markets in the United States. In
the event a Fund reaches position limits imposed by the CFTC or a
futures exchange with respect to an Index Futures Contract, the
Managing Owner, may in its commercially reasonable judgment, cause the
Fund to invest in Substitute Futures or Financial Instruments
referencing the particular Index Futures Contract, or Financial
Instruments not referencing the particular Index Futures Contract, if
such instruments tend to exhibit trading prices or returns that
correlate with the corresponding Index or any Index Futures Contract
and will further the investment objective of the Fund.\17\ A Fund may
also invest in Substitute Futures or Financial Instruments if the
market for a specific Index Futures Contract experiences emergencies
(such as a natural disaster, terrorist attack or an act of God) or
disruptions (such as a trading halt or flash crash) that prevent the
Fund from obtaining the appropriate amount of investment exposure to
the affected Index Futures Contract.\18\
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\17\ To the extent practicable, a Fund will invest in swaps
cleared through the facilities of a centralized clearing house.
\18\ According to the Registration Statements, the Managing
Owner will also attempt to mitigate each Fund's credit risk by
transacting only with large, well-capitalized institutions using
measures designed to determine the creditworthiness of a
counterparty. The Managing Owner will take various steps to limit
counterparty credit risk, as described under the section ``Financial
Instrument Counterparties'' in the Registration Statements.
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Each Fund also will hold cash and United States Treasury securities
and other high credit quality short-term fixed income securities
(``Fixed Income Instruments'') for deposit with its Commodity Broker as
margin. No Fund will be ``managed'' by traditional methods, which
typically involve effecting changes in the composition of a portfolio
on the basis of judgments relating to economic, financial and market
considerations with a view to obtaining positive results under changing
market conditions.
According to the Registration Statements, each Leveraged Fund will
allow investors to potentially profit from the daily return of a Long
Index Futures Contract in excess of the daily return of a Short Index
Futures Contract (each term as defined above). The Leveraged Inverse
Fund will allow investors to potentially profit from the daily return
of a Short Index Futures Contract in excess of the daily return of a
Long Index Futures Contract.
A Fund's Index consists of two Sub-Indexes. A Long Sub-Index
reflects a passive exposure to a certain near-month long Index Futures
Contract. A Short Sub-Index reflects a passive exposure to a certain
near-month short Index Futures Contract.\19\ Each Index is designed to
reflect +100% of the spread, or the difference, in daily return,
positive or negative, between the Long Sub-Index and the Short Sub-
Index plus the return on a risk free component.
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\19\ The Long Sub-Index, Long Index Futures Contract, Short Sub-
Index and Short Index Futures Contract for each Fund are set forth
in the chart above.
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Each Fund intends to track its corresponding Index on a leveraged
basis by creating a portfolio of long and short positions. The Managing
Owner will determine the type, quantity and combination of Index
Futures Contracts, and, as applicable, Substitute Futures and Financial
Instruments, the Managing Owner believes may produce daily returns
consistent with the applicable Fund's daily and leveraged objective.
Each Index is rebalanced daily as of the Index Calculation Time (as
defined below) in order to continue to reflect the spread, or the
difference in the daily return between two specific market segments. By
rebalancing each Index on a daily basis as of the Index Calculation
Time, each Index will then be comprised of equal notional amounts
(i.e., +100% and -100%, respectively) of both of its Long Index Futures
Contracts and Short Index Futures Contracts in accordance with its
daily objectives. Daily rebalancing of each Index will lead to
different results than would otherwise occur if an Index, and in turn,
its corresponding Fund, were to be rebalanced less frequently or more
frequently than daily.
Because each Fund will seek to achieve its daily investment
objective by tracking its corresponding Index on a daily and leveraged
basis, each Fund will seek to rebalance daily both its long and short
positions around the net asset value (``NAV'') Calculation Time (as
described below under ``Net Asset Value''). The purpose of daily
rebalancing is to reposition each Fund's investments in accordance with
its daily investment objective.
As described in the Registration Statements, each Fund will have a
leverage ratio of approximately 4:1 \20\ upon daily rebalancing, which
increases the potential for trading profits and losses. The use of
leverage increases the potential for both trading profits and losses,
depending on the changes in market value of the Long Index Futures
Contracts positions, the Short Index Futures Contracts positions (and/
or Substitute Futures and Financial Instruments, as applicable), of
each Fund. Holding futures positions with a notional amount in excess
of each Fund's NAV constitutes a form of leverage. Because the notional
value of each Fund's Index Futures Contracts (and/or Substitute Futures
and Financial Instruments, as applicable), will rise or fall throughout
each trading day and prior to rebalancing, the leverage ratio could be
higher or lower than an approximately 4:1 leverage ratio between the
notional value of a Fund's portfolio and a Fund's Equity (estimated
NAV) immediately after rebalancing. As the ratio increases, an
investor's losses may increase correspondingly.
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\20\ See also discussion regarding dollar neutrality in the
following section ``Examples Explaining the Initial Allocation of
the Funds.''
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Each Sub-Index, which is comprised of a certain Index Futures
Contract, includes provisions for the replacement (also referred to as
``rolling'') of its Index Futures Contract as it approaches its
[[Page 1480]]
expiration date. ``Rolling'' is a procedure which involves closing out
the Index Futures Contract that will soon expire and establishing a
position in a new Index Futures Contract with a later expiration date
pursuant to the rules of each Sub-Index. In turn, each Fund will seek
to roll its Index Futures Contracts in a manner consistent with its
Sub-Index's provisions for the replacement of an Index Futures Contract
that is approaching maturity.
Examples Explaining the Initial Allocation of the Funds
As described below, each Fund will seek to invest in a manner such
that the dollar value i.e., described as Fund Equity below) of a Fund's
holdings of both its Long Index Futures Contracts and Short Index
Futures Contracts will be approximately equal, which is commonly
referred to as ``dollar neutrality.''
Each Fund's daily performance will reflect the gain or loss from
the spread, or the difference between the applicable Long Index Futures
Contracts and Short Index Futures Contracts, any income from a Fund's
collateral, and a decrease in the NAV of the Fund due to its fees and
expenses.
Leveraged Funds
For a Leveraged Fund, a long position is established in the Long
Index Futures Contract seeking to provide a leveraged exposure to the
Long Sub-Index. A Leveraged Fund will purchase a sufficient number of
Long Index Futures Contracts targeting a long notional exposure
equivalent to approximately +200% of a Fund's estimated NAV, or Fund
Equity. Additionally, a Leveraged Fund will establish a short position
in the Short Index Futures Contracts seeking to provide a leveraged
exposure to the Short Sub-Index. Accordingly, a Leveraged Fund will
sell a sufficient number of Short Index Futures Contracts targeting a
short notional exposure equivalent to approximately -200% of Fund
Equity. Therefore, immediately after establishing each of these
positions, the target gross notional exposure of a Leveraged Fund's
aggregate Long Index Futures Contracts and Short Index Futures
Contracts will equal approximately +400% (i.e., +200% long and +200%
short) of Fund Equity.
For example, assume that Fund Equity is $100 million. A Leveraged
Fund may seek to purchase a quantity of Long Index Futures Contracts
with a total long notional value of approximately + $200 million (i.e.,
+200% of $100 million). Additionally, a Leveraged Fund may seek to sell
a quantity of Short Index Futures Contracts with a total short notional
value of approximately -$200 million (i.e., -200% of $100 million).
Consequently, a Leveraged Fund may seek to hold Long Index Futures
Contracts and Short Index Futures Contracts with a gross notional value
of approximately +$400 million (i.e., +$200 million long and + $200
million short). A Leveraged Fund will experience a gain or loss
depending predominantly on the Fund's beginning exposure to its Index
Futures Contracts, and the ensuing return of the Index Futures
Contracts.
As described previously, assume initially that Fund Equity was $100
million. Prior to any changes in the value of Fund Equity, the
beginning exposure to the Long Index Futures Contract would be +$200
million and the beginning exposure to the Short Index Futures Contract
would be - $200 million. Therefore, the Leveraged Fund would be
positioned to return +200% of the spread, or the difference in return
between the Long Index Futures Contract and the Short Index Futures
Contract.
Leveraged Inverse Fund
For the Leveraged Inverse Fund, a long position is established in
the Short Index Futures Contract seeking to provide a leveraged
exposure to the Short Sub-Index. The Leveraged Inverse Fund will
purchase a sufficient number of Short Index Futures Contracts targeting
a long notional exposure equivalent to approximately +200% of Fund
Equity. Additionally, the Leveraged Inverse Fund will establish a short
position in the Long Index Futures Contracts seeking to provide a
leveraged exposure to the Long Sub-Index. Accordingly, the Leveraged
Inverse Fund will sell a sufficient number of Long Index Futures
Contracts targeting a short notional exposure equivalent to
approximately -200% of Fund Equity. Therefore, immediately after
establishing each of these positions, the target gross notional
exposure of the Leveraged Inverse Fund's aggregate Long Index Futures
Contracts and Short Index Futures Contracts will equal approximately
+400% (i.e., +200% long and +200% short) of Fund Equity.
For example, assume that Fund Equity is $100 million. As
illustrated below, the Leveraged Inverse Fund may seek to purchase a
quantity of Short Index Futures Contracts with a total long notional
value of approximately +$200 million (i.e., +200% of $100 million).
Additionally, the Leveraged Inverse Fund may seek to sell a quantity of
Long Index Futures Contracts with a total short notional value of
approximately -$200 million (i.e., -200% of $100 million).
Consequently, the Leveraged Inverse Fund may seek to hold Long Index
Futures Contracts and Short Index Futures Contracts with a gross
notional value of approximately +$400 million (i.e., +$200 million long
and +$200 million short).
The Leveraged Inverse Fund will experience a gain or loss depending
predominantly on the Fund's beginning exposure to its Index Futures
Contracts and the ensuing return of the Index Futures Contracts.
As described previously, assume initially that Fund Equity was $100
million. Prior to any changes in the value of Fund Equity, the
beginning exposure to the Short Index Futures Contract would be +$200
million and the beginning exposure to the Long Index Futures Contract
would be -$200 million. Therefore, the Leveraged Inverse Fund would be
positioned to return -200% of the spread, or the difference in return
between the Long Index Futures Contract and the Short Index Futures
Contract.
Overview of the Funds
FactorShares 2X: S&P500 Bull/TBond Bear
The FactorShares 2X: S&P500 Bull/TBond Bear is designed for
investors who believe the large-cap U.S. equity market segment will
increase in value relative to the long-dated U.S. Treasury market
segment. According to its Registration Statement, the objective of the
FactorShares 2X: S&P500 Bull/TBond Bear will be to seek to track
approximately +200% of the daily return of the S&P U.S. Equity Risk
Premium Total Return Index. The Fund will seek to track the spread, or
the difference in daily returns between the U.S. equity and interest
rate market segments by primarily establishing a leveraged long
position in the E-mini Standard and Poor's 500 Stock Price Index\TM\
Futures (``Equity Index Futures Contract''), and a leveraged short
position in the 30-Year U.S. Treasury Bond Futures (``Treasury Index
Futures Contract'').
The Equity Index Futures Contract provides an exposure to a major
benchmark index with respect to large-cap U.S. equities known as the
S&P 500[supreg] Index. The Equity Index Futures Contract is a futures
contract that provides and permits investors to invest in a substitute
instrument in place of the underlying, speculate or hedge, as
applicable, in large-cap U.S. equities. The Equity Index Futures
Contract serves as a proxy for large-cap U.S.
[[Page 1481]]
equities because the performance of the Equity Index Futures Contract
is dependent upon and reflects the changes in the S&P 500[supreg],
which is an index that reflects the performance of each of the
underlying 500 large-cap U.S. equities. The Treasury Index Futures
Contract provides an exposure to the interest rate market segment with
respect to 30-Year U.S. Treasury Bonds. The Treasury Index Futures
Contract is a futures contract that provides and permits investors to
invest in a substitute instrument in place of the underlying, speculate
or hedge, as applicable, in the direction of interest rates with
respect to long-term Treasury Bonds. The Treasury Index Futures
Contract serves as a proxy for 30-Year U.S. Treasury Bonds because the
performance of the Treasury Index Futures Contract is dependent upon
and reflects the changes in the price of the underlying 30-Year U.S.
Treasury Bonds.
In order to pursue its investment objective, the FactorShares 2X:
S&P500 Bull/TBond Bear will seek to invest approximately +200% of the
value of its Fund Equity (i.e., the estimated NAV) in the front month
Equity Index Futures Contract and/or Substitute Futures and Financial
Instruments, as applicable. Simultaneously, the Fund seeks to invest
approximately -200% of the value of its Fund Equity in the front month
Treasury Index Futures Contract and/or Substitute Futures and Financial
Instruments, as applicable. Around the NAV Calculation Time, and in
order to continue to pursue its daily investment objective, the Fund
seeks to rebalance daily its front month Equity Index Futures Contracts
and/or Substitute Futures and Financial Instruments, as applicable, to
equal approximately +200% of the value of its Fund Equity. Similarly,
around the NAV Calculation Time, the Fund will seek to rebalance daily
its front month Treasury Index Futures Contract and/or Substitute
Futures and Financial Instruments, as applicable, to equal
approximately -200% of the value of its Fund Equity.
FactorShares 2X: TBond Bull/S&P500 Bear
The FactorShares 2X: TBond Bull/S&P500 Bear is designed for
investors who believe the long-dated U.S. Treasury market segment will
increase in value relative to the large-cap U.S. equity market segment.
According to its Registration Statement, the objective of the
FactorShares 2X: TBond Bull/S&P500 Bear will be to seek to track
approximately -200% of the daily return of the S&P U.S. Equity Risk
Premium Total Return Index. The Fund will seek to track the spread or
the difference in daily returns between the interest rate and U.S.
equity market segments by primarily establishing a leveraged long
position in the Treasury Index Futures Contract and a leveraged short
position in the Equity Index Futures Contract.
The Treasury Index Futures Contract provides an exposure to the
interest rate market segment with respect to 30-Year U.S. Treasury
Bonds. The Treasury Index Futures Contract is a futures contract that
provides and permits investors to invest in a substitute instrument in
place of the underlying, speculate or hedge, as applicable, in the
direction of interest rates with respect to long-term Treasury Bonds.
The Treasury Index Futures Contract serves as a proxy for 30-Year U.S.
Treasury Bonds because the performance of the Treasury Index Futures
Contract is dependent upon and reflects the changes in the price of the
underlying 30-Year U.S. Treasury Bonds. The Equity Index Futures
Contract provides an exposure to the S&P 500[supreg] Index. The Equity
Index Futures Contract is a futures contract that provides and permits
investors to invest in a substitute instrument in place of the
underlying, speculate or hedge, as applicable, in large-cap U.S.
equities. The Equity Index Futures Contract serves as a proxy for
large-cap U.S. equities because the performance of the Equity Index
Futures Contract is dependent upon and reflects the changes in the S&P
500[supreg].
In order to pursue its investment objective, the FactorShares 2X:
TBond Bull/S&P500 Bear will seek to invest approximately +200% of the
value of its Fund Equity (i.e., the estimated NAV) in the front month
Treasury Index Futures Contract and/or Substitute Futures and Financial
Instruments, as applicable. Simultaneously, the Fund will seek to
invest approximately - 200% of the value of its Fund Equity in the
front month Equity Index Futures Contract and/or Substitute Futures and
Financial Instruments, as applicable. Around the NAV Calculation Time,
and in order to continue to pursue its daily investment objective, the
Fund will seek to rebalance daily its front month Treasury Index
Futures Contracts and/or Substitute Futures and Financial Instruments,
as applicable, to equal approximately +200% of the value of its Fund
Equity. Similarly, around the NAV Calculation Time, the Fund will seek
to rebalance daily its front month Equity Index Futures Contract and/or
Substitute Futures and Financial Instruments, as applicable, to equal
approximately - 200% of the value of its Fund Equity.
FactorShares 2X: S&P500 Bull/USD Bear
The FactorShares 2X: S&P500 Bull/USD Bear is designed for investors
who believe the large-cap U.S. equity market segment will increase in
value relative to the general indication of the international value of
the U.S. dollar. According to its Registration Statement, the objective
of the FactorShares 2X: S&P500 Bull/USD Bear will be to seek to track
approximately +200% of the daily return of the S&P 500 Non-U.S. Dollar
Index. The Fund will seek to track the spread or the difference in
daily returns between the U.S. equity and currency market segments by
primarily establishing a leveraged long position in the Equity Index
Futures Contract, and a leveraged short position in the U.S. Dollar
Index[supreg] Futures (``Currency Index Futures Contract'').
The Equity Index Futures Contract provides an exposure to the S&P
500[supreg] Index. The Equity Index Futures Contract is a futures
contract that provides and permits investors to invest in a substitute
instrument in place of the underlying, speculate or hedge, as
applicable, in large-cap U.S. equities. The Equity Index Futures
Contract serves as a proxy for large-cap U.S. equities because the
performance of the Equity Index Futures Contract is dependent upon and
reflects the changes in the S&P 500[supreg]. The Currency Index Futures
Contract provides an exposure to the international value of the U.S.
dollar. The Currency Index Futures Contract is a futures contract that
provides and permits investors to invest in a substitute instrument in
place of the underlying, speculate or hedge, as applicable, in the
direction of the U.S. dollar relative to a basket of six major world
currencies. The Currency Index Futures Contract serves as a proxy for
the international value of the U.S. dollar relative to the six major
world currencies because the performance of the Currency Index Futures
Contract is dependent upon and reflects the changes in the U.S. Dollar
Index (USDX[supreg]), which is an index which reflects the performance
of each of the underlying basket of six major world currencies relative
to the U.S. dollar.
In order to pursue its investment objective, the FactorShares 2X:
S&P500 Bull/USD Bear will seek to invest approximately +200% of the
value of its Fund Equity (i.e., the estimated NAV) in the front month
Equity Index Futures Contract and/or Substitute Futures and Financial
Instruments, as applicable. Simultaneously, the Fund seeks to invest
approximately -200% of the value of its Fund Equity in the front month
Currency Index Futures Contract
[[Page 1482]]
and/or Substitute Futures and Financial Instruments, as applicable.
Around the NAV Calculation Time, and in order to continue to pursue its
daily investment objective, the Fund seeks to rebalance daily its front
month Equity Index Futures Contracts and/or Substitute Futures and
Financial Instruments, as applicable, to equal approximately +200% of
the value of its Fund Equity. Similarly, around the NAV Calculation
Time, the Fund will seek to rebalance daily its front month Currency
Index Futures Contract and/or Substitute Futures and Financial
Instruments, as applicable, to equal approximately -200% of the value
of its Fund Equity.
FactorShares 2X: Oil Bull/S&P500 Bear
The FactorShares 2X: Oil Bull/S&P500 Bear is designed for investors
who believe that crude oil will increase in value relative to the
large-cap U.S. equity market segment. According to its Registration
Statement, the objective of the FactorShares 2X: Oil Bull/S&P500 Bear
will be to seek to track approximately +200% of the daily return of the
S&P Crude Oil-Equity Spread Total Return Index. The Fund will seek to
track the spread or the difference in daily returns between the oil and
U.S. equity market segments by primarily establishing a leveraged long
position in the Oil Index Futures Contract, as defined below, and a
leveraged short position in the Equity Index Futures Contract.
The Oil Index Futures Contract provides an exposure to the oil
market segment with respect to light sweet crude oil. The Oil Index
Futures Contract is a futures contract that provides and permits
investors to invest in a substitute instrument in place of the
underlying, speculate or hedge, as applicable, in the direction of the
value of light sweet crude oil. The Oil Index Futures Contract serves
as a proxy for light sweet crude oil because the performance of the Oil
Index Futures Contract is dependent upon and reflects the changes in
the price of light sweet crude oil. The Equity Index Futures Contract
provides an exposure to the S&P 500[supreg] Index. The Equity Index
Futures Contract is a futures contract that provides and permits
investors to invest in a substitute instrument in place of the
underlying, speculate or hedge, as applicable, in large-cap U.S.
equities. The Equity Index Futures Contract serves as a proxy for
large-cap U.S. equities because the performance of the Equity Index
Futures Contract is dependent upon and reflects the changes in the S&P
500[supreg].
In order to pursue its investment objective, the FactorShares 2X:
Oil Bull/S&P500 Bear will seek to invest approximately +200% of the
value of its Fund Equity (i.e., the estimated NAV) in the front month
Oil Index Futures Contract and/or Substitute Futures and Financial
Instruments, as applicable. Simultaneously, the Fund will seek to
invest approximately-200% of the value of its Fund Equity in the front
month Equity Index Futures Contract and/or Substitute Futures and
Financial Instruments, as applicable. Around the NAV Calculation Time,
and in order to continue to pursue its daily investment objective, the
Fund will seek to rebalance daily its front month Oil Index Futures
Contracts and/or Substitute Futures and Financial Instruments, as
applicable, to equal approximately +200% of the value of its Fund
Equity. Similarly, around the NAV Calculation Time, the Fund will seek
to rebalance daily its front month Equity Index Futures Contract and/or
Substitute Futures and Financial Instruments, as applicable, to equal
approximately -200% of the value of its Fund Equity.
FactorShares 2X: Gold Bull/S&P500 Bear
The FactorShares 2X: Gold Bull/S&P500 Bear is designed for
investors who believe that gold will increase in value relative to the
large-cap U.S. equity market segment. According to its Registration
Statement, the objective of the FactorShares 2X: Gold Bull/S&P500 Bear
will be to seek to track approximately +200% of the daily return of the
S&P Gold-Equity Spread Total Return Index. The Fund will seek to track
the spread or the difference in daily returns between the gold and U.S.
equity market segments by primarily establishing a leveraged long
position in the Gold Index Futures Contract, as defined below, and a
leveraged short position in the Equity Index Futures Contract.
The Gold Index Futures Contract provides an exposure to the
precious metals market segment with respect to gold. The Gold Index
Futures Contract is a futures contract that provides and permits
investors to invest in a substitute instrument in place of the
underlying, speculate or hedge, as applicable, in the direction of the
value of gold. The Gold Index Futures Contract serves as a proxy for
gold because the performance of the Gold Index Futures Contract is
dependent upon and reflects the changes in the price of gold. The
Equity Index Futures Contract provides an exposure to the S&P
500[supreg] Index. The Equity Index Futures Contract is a futures
contract that provides and permits investors to invest in a substitute
instrument in place of the underlying, speculate or hedge, as
applicable, in large-cap U.S. equities. The Equity Index Futures
Contract serves as a proxy for large-cap U.S. equities because the
performance of the Equity Index Futures Contract is dependent upon and
reflects the changes in the S&P 500[supreg].
In order to pursue its investment objective, the FactorShares 2X:
Gold Bull/S&P500 Bear will seek to invest approximately +200% of the
value of its Fund Equity (i.e., the estimated NAV) in the front month
Gold Index Futures Contract and/or Substitute Futures and Financial
Instruments, as applicable. Simultaneously, the Fund will seek to
invest approximately - 200% of the value of its Fund Equity in the
front month Equity Index Futures Contract and/or Substitute Futures and
Financial Instruments, as applicable. Around the NAV Calculation Time,
and in order to continue to pursue its daily investment objective, the
Fund will seek to rebalance daily its front month Gold Index Futures
Contracts and/or Substitute Futures and Financial Instruments, as
applicable, to equal approximately +200% of the value of its Fund
Equity. Similarly, around the NAV Calculation Time, the Fund will seek
to rebalance daily its front month Equity Index Futures Contract and/or
Substitute Futures and Financial Instruments, as applicable, to equal
approximately- 200% of the value of its Fund Equity.
Net Asset Value
According to each Registration Statement, NAV, in respect of a
Fund, means the total assets of the applicable Fund including, but not
limited to, all cash and cash equivalents or other debt securities less
total liabilities of such Fund, each determined on the basis of
generally accepted accounting principles in the United States,
consistently applied under the accrual method of accounting. In
particular, NAV includes any unrealized profit or loss on open futures
contracts, Financial Instruments (if any), and any other credit or
debit accruing to a Fund but unpaid or not received by a Fund. All open
futures contracts traded on a United States exchange are calculated at
their then current market value, which are based upon the settlement
price for that particular futures contract traded on the applicable
United States exchange on the date with respect to which NAV is being
determined; provided, that if a futures contract traded on a United
States exchange could not be liquidated on such day, due to the
operation of daily limits or
[[Page 1483]]
other rules of the exchange upon which that position is traded or
otherwise, the settlement price on the most recent day on which the
position could have been liquidated will be the basis for determining
the market value of such position for such day. The current market
value of all open futures contracts traded on a non-United States
exchange, to the extent applicable, are based upon the settlement price
for that particular futures contract traded on the applicable non-
United States exchange on the date with respect to which NAV is being
determined; provided further, that if a futures contract traded on a
non-United States exchange, to the extent applicable, could not be
liquidated on such day, due to the operation of daily limits (if
applicable) or other rules of the exchange upon which that position is
traded or otherwise, the settlement price on the most recent day on
which the position could have been liquidated will be the basis for
determining the market value of such position for such day. The
Managing Owner may in its discretion (and under extraordinary
circumstances, including, but not limited to, periods during which a
settlement price of a futures contract is not available due to exchange
limit orders 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) value any asset of a Fund pursuant to such other
principles as the Managing Owner deems fair and equitable so long as
such principles are consistent with normal industry standards. Interest
earned on any Fund's futures brokerage account, if applicable, will be
accrued at least monthly. The amount of any distribution will be a
liability of such Fund from the day when the distribution is declared
until it is paid.
The NAV of each Fund is calculated as of the first to settle of the
corresponding Index Futures Contracts, provided that no Fund will
calculate its NAV after 4 p.m. Eastern Time (``E.T.''). For example,
the futures exchanges on which the E-mini Standard and Poor's 500 Stock
Price IndexTM Futures (Long Index Futures Contracts) and the
30-Year U.S. Treasury Bond Futures (Short Index Futures Contracts) of
the FactorShares 2X: S&P500 Bull/TBond Bear fund settle at 4:15 p.m.
E.T. and 3 p.m. E.T., respectively. Therefore, as detailed in the table
below, the FactorShares 2X: S&P500 Bull/TBond Bear fund will calculate
its NAV, or NAV Calculation Time, as of 3 p.m. E.T.
---------------------------------------------------------------------------
\21\ The Commission previously has approved commodity-based or
currency-based trust securities for which the NAV is calculated
earlier than 4 p.m., E.T. See, e.g., Securities Exchange Act Release
Nos. 50603 (October 28, 2004), 69 FR 64614 (November 5, 2004) (SR-
NYSE-2004-22) (order approving listing of streetTRACKS Gold Trust);
52843 (November 28, 2005), 70 FR 72486 (December 5, 2005) (SR-NYSE-
2005-65) (order approving listing of Euro Currency Trust); and 61219
(December 22, 2009), 74 FR 68886 (December 29, 2009) (SR-NYSEArca-
2009-95) (order approving listing of ETFS Platinum Trust).
\22\ Because the first to settle Index Futures Contracts for the
FactorShares 2X: Oil Bull/S&P500 Bear and FactorShares 2X: Gold
Bull/S&P500 Bear funds are each different than the first to settle
Index Futures Contracts for the remaining Funds, the NAV Calculation
Time for each of the FactorShares 2X: Oil Bull/S&P500 Bear and
FactorShares 2X: Gold Bull/S&P500 Bear funds differ from the
remaining Funds.
---------------------------------------------------------------------------
Fund NAV Calculation Times (E.T.):
----------------------------------------------------------------------------------------------------------------
Long Index Futures Short Index Futures
Fund Contract: settlement Contract: settlement First to settle/NAV Calculation
time time Time \21\
----------------------------------------------------------------------------------------------------------------
FactorShares 2X: S&P500 Bull/TBond E-mini Standard and 30 Year U.S. 3 p.m.
Bear. Poor's 500 Stock Treasury Bond
Price Index\TM\ Futures: 3 p.m.
Futures: 4:15 p.m.
FactorShares 2X: TBond Bull/S&P500 30 Year U.S. Treasury E-mini Standard and 3 p.m.
Bear. Bond Futures: 3 p.m. Poor's 500 Stock
Price Index\TM\
Futures: 4:15 p.m.
FactorShares 2X: S&P500 Bull/USD E-mini Standard and U.S. Dollar 3 p.m.
Bear. Poor's 500 Stock Index[supreg]
Price Index\TM\ Futures:.
Futures: 4:15 p.m. 3 p.m...............
FactorShares 2X: Oil Bull/S&P500 Light Sweet Crude Oil E-mini Standard and 2:30 p.m.
Bear \22\. Futures: 2:30 p.m. Poor's 500 Stock
Price Index\TM\
Futures: 4:15 p.m.
FactorShares 2X: Gold Bull/S&P500 Gold Futures: 1:30 E-mini Standard and 1:30 p.m.
Bear. p.m. Poor's 500 Stock
Price Index\TM\
Futures: 4:15 p.m.
----------------------------------------------------------------------------------------------------------------
A Fund's daily NAV may reflect the closing settlement price and/or
the last traded value just before the NAV Calculation Time, as
applicable, for each of its Index Futures Contracts. A Fund's daily NAV
will reflect the closing settlement price for each of its Index Futures
Contracts if an Index Future Contract's closing settlement price is
determined at or just before the NAV Calculation Time. If the exchange
on which a Fund's Index Futures Contract does not determine the closing
settlement price at or just before the NAV Calculation Time, then the
last traded value for that Index Futures Contract up until (but
excluding) the NAV Calculation Time will be reflected in the NAV.
For example, the closing settlement price of the 30-Year U.S.
Treasury Bond Futures occurs at or around 3 p.m. E.T., or just before
the NAV Calculation Time for the FactorShares 2X: S&P500 Bull/TBond
Bear. Accordingly, the Index Futures Contract price used to determine
the NAV for 30-Year U.S. Treasury Bond Futures positions held by the
FactorShares 2X: S&P500 Bull/TBond Bear will be the corresponding
closing settlement price of 30-Year U.S. Treasury Bond Futures as
reported by CME. However, the closing settlement price for the E-mini
Standard and Poor's 500 Stock Price IndexTM Futures is
determined at or around 4:15 p.m. E.T., which occurs 75 minutes after
the NAV Calculation Time of FactorShares 2X: S&P500 Bull/TBond Bear.
Therefore, the Index Futures Contract price used to determine the NAV
for E-mini Standard and Poor's 500 Stock Price IndexTM
Futures positions held by the FactorShares 2X: S&P500 Bull/TBond Bear
will be the last traded value for the E-mini Standard and Poor's 500
Stock Price IndexTM Futures up until (but excluding) 3 p.m.
E.T.
In calculating the NAV of a Fund, the settlement value of a
Financial Instrument is determined by applying the terms as provided
under the applicable Financial Instrument. However, in the event that
an underlying Index Futures Contract is not trading due to the
operation of daily limits or otherwise, the Managing Owner may in its
sole discretion choose to value the Fund's Financial Instruments
referencing such Index Futures Contract on a fair value basis in order
to calculate the Fund's NAV.
NAV per Fund Share, in respect of a Fund, is the NAV of the Fund
divided by the number of its outstanding Fund Shares.
[[Page 1484]]
Pricing Information Available on the NYSE Arca and Other Sources
According to the Registration Statements, the Index Sponsor will
calculate the Indicative Index Value (``IIV'') of each Index on a total
return basis. In order to calculate the IIV, the Index Sponsor polls
Reuters every 15 seconds of each trading day to determine the real-time
value of each of the following components of each Index: Price of the
underlying Long Index Futures Contracts; price of the underlying Short
Index Futures Contracts; and the pro-rated risk free rate, which is the
3-month U.S. Treasury bill, with respect to each applicable Index. The
Index Sponsor then applies a set of rules to the above values to create
the indicative level of each Long Sub-Index and each Short Sub-Index,
and in turn, each Index. The IIV and closing level of each Index and
Sub-Index will be calculated until the last to settle of NYSE Arca or
the last to settle of the exchanges on which the Fund's Index Futures
Contracts are traded, provided, however, that no IIV will be calculated
after 4:15 p.m. E.T. (``Index Calculation Time''). These rules are
consistent with the rules which the Index Sponsor applies at the end of
each trading day to calculate the closing level of each Index and Sub-
Index. A similar polling process is applied to the U.S. Treasury bills,
or any other applicable Fixed Income Instruments, to determine the
indicative value of the Fixed Income Instruments held by each Fund
every 15 seconds throughout the trading day.
An Index and Sub-Index value will be calculated on each business
day as determined by the futures exchanges on which each Index's Long
Index Futures Contract and/or a Short Index Futures Contract trades.
The Index Sponsor will continue to calculate each Index and Sub-Index
even on days when the futures exchanges on which each Index's Long
Index Futures Contract and/or a Short Index Futures Contract trades are
open and NYSE Arca is closed.
The IIV per Share of each Fund is calculated by applying the
percentage price change of each Fund's holdings in futures contracts
(and/or Substitute Futures and Financial Instruments, as applicable) to
the last published NAV of each Fund and will be disseminated (in U.S.
dollars) by one or more market data vendors every 15 seconds during the
NYSE Arca Core Trading Session of 9:30 a.m. to 4 p.m. E.T.
The current trading price per Share of each Fund (quoted in U.S.
dollars) will be published continuously under its own ticker symbol as
trades occur throughout each trading day on the consolidated tape,
Reuters and/or Bloomberg.
The Index Sponsor publishes the intra-day level of each Index and
Sub-Index, which is available to subscribers. The intra-day level of
each Index and Sub-Index is also published once every 15 seconds during
the NYSE Arca Core Trading Session on the consolidated tape, Reuters
and/or Bloomberg.
The Index Sponsor publishes the closing level of each Index and the
Sub-Indexes daily at the Index Sponsor's Web site at http://www.standardandpoors.com. The most recent end-of-day closing level of
each Index and Sub-Index is published under its own symbol as of the
close of business for NYSE Arca each trading day on the consolidated
tape, Reuters and/or Bloomberg, or any successor thereto.
The Managing Owner publishes the NAV of each Fund and the NAV per
Share of each Fund daily. The most recent end-of-day NAV of each Fund
is published under its own symbol as of the close of business on
Reuters and/or Bloomberg and on the Managing Owner's Web site at http://www.factorshares.net, or any successor thereto. In addition, the most
recent end-of-day NAV of each Fund is published the following morning
on the consolidated tape.
The Funds will provide Web site disclosure of the portfolio
holdings daily and will include, as applicable, the names and value (in
U.S. dollars) of Index Futures Contracts, Substitute Futures and
Financial Instruments, as applicable, and characteristics of these
Index Futures Contracts and Substitute Futures and Financial
Instruments, as applicable, and Fixed Income Instruments, and the
amount of cash held in the portfolio of the Funds. This Web site
disclosure of the portfolio composition of the Funds will occur at the
same time as the disclosure by the Managing Owner of the portfolio
composition to Authorized Participants so that all market participants
are provided portfolio composition information at the same time.
Therefore, the same portfolio information will be provided on the
Funds' public Web site as well as in electronic files provided to
Authorized Participants. Accordingly, each investor will have access to
the current portfolio composition of the Funds through the Managing
Owner's Web site.
Creation and Redemption of Shares
Each Fund creates and redeems Shares from time-to-time, but only in
one or more Baskets. A Basket is a block of 100,000 Shares. Baskets may
be created or redeemed only by Authorized Participants, as described in
the Registration Statements, except that the initial Baskets will be
created by the Initial Purchaser. Except when aggregated in Baskets,
the Shares are not redeemable securities. Authorized Participants pay a
transaction fee of $500 in connection with each order to create or
redeem one or more Baskets. Authorized Participants may sell the Shares
included in the Baskets they purchase from the Funds to other
investors.
On any business day, an Authorized Participant may place an order
with the Distributor to create one or more Baskets. For purposes of
processing both purchase and redemption orders, a ``business day''
means any day other than a day when banks in New York City are required
or permitted to be closed. Purchase orders must be placed by no later
than 5 hours prior to the close of NYSE Arca, which would be
customarily 11 a.m. E.T. However, from time-to-time, NYSE Arca may have
an early close at, for example, 1 p.m. E.T. (e.g., day after
Thanksgiving). On these days, purchase orders must be placed by no
later than 8 a.m. E.T., which would be 5 hours prior to the early close
of NYSE Arca. The day on which the Distributor receives a valid
purchase order is the purchase order date. Purchase orders are
irrevocable. By placing a purchase order, and prior to delivery of such
Baskets, an Authorized Participant's DTC account will be charged the
non-refundable transaction fee due for the purchase order.
Determination of Required Payment
The total cash payment required to create each Basket is the NAV of
100,000 Shares of the applicable Fund as of the NAV Calculation Time,
on the purchase order date. Baskets are issued as of noon, E.T., on the
business day immediately following the purchase order date at the
applicable NAV per Share as of the NAV Calculation Time, on the
purchase order date, but only if the required payment has been timely
received.
Because orders to purchase Baskets must be placed by no later than
5 hours prior to the close of NYSE Arca, but the total payment required
to create a Basket will not be determined until the NAV Calculation
Time on the date the purchase order is received, Authorized
Participants will not know the total amount of the payment required to
create a Basket at the time they submit an irrevocable purchase order
for the Basket. The NAV of a Fund and the total amount of the payment
required to
[[Page 1485]]
create a Basket could rise or fall substantially between the time an
irrevocable purchase order is submitted and the NAV Calculation Time.
Redemption Procedures
The procedures by which an Authorized Participant can redeem one or
more Baskets mirror the procedures for the creation of Baskets. On any
business day, an Authorized Participant may place an order with the
Distributor to redeem one or more Baskets. Redemption orders must be
placed by no later than 5 hours prior to the close of NYSE Arca, which
would be customarily 11 a.m. E.T. However, from time-to-time, NYSE Arca
may have an early close at, for example, 1 p.m. E.T. On these days,
redemption orders must be placed by no later than 8 a.m. E.T., which
would be 5 hours prior to the early close of NYSE Arca. The day on
which the Distributor receives a valid redemption order is the
redemption order date. Redemption orders are irrevocable. The
redemption procedures allow Authorized Participants to redeem Baskets.
Individual shareholders may not redeem directly from a Fund. Instead,
individual shareholders may only redeem Shares in integral multiples of
100,000 and only through an Authorized Participant.
By placing a redemption order, an Authorized Participant agrees to
deliver the Baskets to be redeemed through DTC's book-entry system to
the applicable Fund not later than noon, E.T., on the business day
immediately following the redemption order date. By placing a
redemption order, and prior to receipt of the redemption proceeds, an
Authorized Participant's DTC account will be charged the non-refundable
transaction fee due for the redemption order.
Determination of Redemption Proceeds
The redemption proceeds from a Fund consist of the cash redemption
amount. The cash redemption amount is equal to the NAV of the number of
Basket(s) of such Fund requested in the Authorized Participant's
redemption order as of the NAV Calculation Time, on the redemption
order date. The Distributor will instruct the Transfer Agent and the
Custodian of redemption orders by close of business on the redemption
order date. The Custodian will distribute the cash redemption amount at
noon, E.T., on the business day immediately following the redemption
order date through DTC to the account of the Authorized Participant as
recorded on DTC's book-entry system, but only if the applicable Baskets
have been timely received.
The redemption proceeds due from a Fund are delivered to the
Authorized Participant at noon, E.T., on the business day immediately
following the redemption order date if, by such time on such business
day immediately following the redemption order date, the Fund's DTC
account has been credited with the Baskets to be redeemed. If the
Fund's DTC account has not been credited with all of the Baskets to be
redeemed by such time, the redemption distribution is delivered to the
extent of whole Baskets received. Any remainder of the redemption
distribution is delivered on the next business day to the extent of
remaining whole Baskets received if the Transfer Agent receives the fee
applicable to the extension of the redemption distribution date which
the Transfer Agent after consulting with the Managing Owner may, from
time-to-time, determine and the remaining Baskets to be redeemed are
credited to the Fund's DTC account by noon, E.T., on such next business
day. Any further outstanding amount of the redemption order will be
cancelled. The Distributor, after consulting with the Managing Owner,
will also be authorized to deliver the redemption distribution
notwithstanding that the Baskets to be redeemed are not credited to the
Fund's DTC account by noon, E.T., on the business day immediately
following the redemption order date if the Authorized Participant has
collateralized its obligation to deliver the Baskets through DTC's
book-entry system on such terms as the Managing Owner may determine
from time-to-time.
Availability of Information Regarding the Shares
The current trading price per Share of each Fund (quoted in U.S.
dollars) will be published continuously under its ticker symbol as
trades occur throughout each trading day on the consolidated tape,
Reuters and/or Bloomberg.
The NAV for each Fund will be calculated by the Administrator once
a day and will be disseminated daily to all market participants at the
same time. The Exchange also will disseminate on a daily basis via the
Consolidated Tape Association (``CTA'') information with respect to the
recent NAV, and Shares outstanding. The Exchange will also make
available on its Web site daily trading volume of each of the Shares.
The closing price and settlement prices of the Index Futures Contracts
are also readily available from the NYMEX, CME, COMEX and ICE, as
applicable, and from automated quotation systems, published or other
public sources, or online information services such as Bloomberg or
Reuters. Quotation and last-sale information regarding the Shares will
be disseminated through the facilities of the CTA.
The Web site for the Funds and/or the Exchange, which are publicly
available at no charge, will contain the following information: (a) The
current NAV per Share daily and the prior business day's NAV; (b) the
reported closing price; (c) the Prospectus; and (d) other quantitative
information.
The daily settlement prices for the Index Futures Contracts are
publicly available on the Web site of the NYMEX, CME and COMEX at
http://www.cmegroup.com and the ICE Web site at http://www.theice.com.
In addition, various data vendors and news publications publish futures
prices and data. The Exchange represents that futures quotes and last-
sale information for the Index Futures Contracts are widely
disseminated through a variety of major market data vendors worldwide,
including Bloomberg and Reuters. In addition, the Exchange further
represents that complete real-time data for the Index Futures Contracts
is available by subscription from Reuters and Bloomberg. NYMEX, CME,
COMEX and ICE also provide delayed futures information on current and
past trading sessions and market news free of charge on their Web
sites. The applicable specific contract specifications for the futures
contracts are also available from such Web sites, as well as other
financial informational sources.
The Funds will provide Web site disclosure of portfolio holdings
daily and will include, as applicable, the names and value (in U.S.
dollars) of Index Futures Contracts, Substitute Futures and Financial
Instruments and characteristics of these Index Futures Contracts,
Substitute Futures and Financial Instruments, as applicable, and Fixed
Income Instruments, and the amount of cash held in the portfolio of the
Funds. This Web site disclosure of the portfolio composition of the
Funds will occur at the same time as the disclosure by the Managing
Owner of the portfolio composition to Authorized Participants so that
all market participants are provided portfolio composition information
at the same time. Therefore, the same portfolio information will be
provided on the public Web site as well as in electronic files provided
to Authorized Participants. Accordingly, each investor will have access
to the current portfolio composition of the Funds through the Funds'
Web site.
In addition, in order to provide updated information relating to
each
[[Page 1486]]
Fund for use by investors and market professionals, an IIV per Share of
each Fund will be calculated, adjusted four times per minute throughout
the NYSE Arca Core Trading Session to reflect the continuous price
changes of such Fund's Index Futures Contracts, Substitute Futures and
Financial Instruments, as applicable. The IIV will provide a
continuously updated estimated NAV per Share and is calculated by using
the prior day's closing NAV per Share of each Fund as a base and
updating that value throughout the trading day to reflect changes in
the value of the applicable Index Futures Contracts, Substitute Futures
and Financial Instruments. The IIV disseminated during NYSE Arca Core
Trading Session should not be viewed as an actual real-time update of
each Fund's NAV, which is calculated only once a day.
As noted above, the IIV will be disseminated on a per Share basis
by one or more major market data vendors every 15 seconds during NYSE
Arca Core Trading Session. The value of a Share of a Fund may be
influenced by non-concurrent trading hours between the NYSE Arca and
the NYMEX, CME, COMEX and ICE Futures, which are the futures exchanges
on which the Index Futures Contracts are traded (collectively, the
``Futures Exchanges''). As a result, during periods when the NYSE Arca
is open and one or more of the Futures Exchanges is closed, trading
spreads and the resulting premium or discount on the Shares may widen
and, therefore, increase the difference between the price of the Shares
and the NAV of the Shares.
The Exchange believes that dissemination of the IIV provides
additional information regarding each Fund that is not otherwise
available to the public and is useful to professionals and investors in
connection with the related Shares trading on the Exchange or the
creation or redemption of such Shares.
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. 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 trading of the Shares will be subject to NYSE Arca Equities
Rule 8.200, Commentary .02(e), which sets forth certain restrictions on
ETP Holders acting as registered Market Makers in Trust Issued Receipts
to facilitate surveillance. See ``Surveillance'' below for more
information.
With respect to trading halts, the Exchange may consider all
relevant factors in exercising its discretion to halt or suspend
trading in the Shares. Trading may be halted because of market
conditions or for reasons that, in the view of the Exchange, make
trading in the Shares inadvisable. These may include: (1) The extent to
which trading is not occurring in the underlying Index Futures
Contracts, or (2) whether other unusual conditions or circumstances
detrimental to the maintenance of a fair and orderly market are
present. In addition, trading in Shares will be subject to trading
halts caused by extraordinary market volatility pursuant to the
Exchange's ``circuit breaker'' rule\23\ or by the halt or suspension of
trading of the underlying Index Futures Contracts.
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\23\ See NYSE Arca Equities Rule 7.12.
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The Fund will meet the initial and continued listing requirements
applicable to Trust Issued Receipts in NYSE Arca Equities Rule 8.200
and Commentary .02 thereto. The Exchange represents that, for the
initial and continued listing of the Shares, the Shares must be in
compliance with NYSE Arca Equities Rule 5.3 and Rule 10A-3 under the
Act.\24\ A minimum of 100,000 Shares for each Fund will be outstanding
as of the start of trading on the Exchange.
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\24\ 17 CFR 240.10A-3.
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The Exchange represents that the Exchange may halt trading during
the day in which the interruption to the dissemination of the IIV, the
Indexes, the Sub-Indexes or the value of the underlying futures
contracts occurs. If the interruption to the dissemination of the IIV,
the Indexes, the Sub-Indexes or the value of the underlying futures
contracts persists past the trading day in which it occurred, the
Exchange will halt trading no later than the beginning of the trading
day following the interruption. In addition, if the Exchange becomes
aware that the NAV with respect to the Shares is not disseminated to
all market participants at the same time, it will halt trading in the
Shares until such time as the NAV is available to all market
participants.
Surveillance
The Exchange intends to utilize its existing surveillance
procedures applicable to derivative products, including Trust Issued
Receipts, to monitor trading in the Shares. 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 applicable Federal securities laws.
The Exchange's current trading surveillances focus on detecting
securities trading outside their normal patterns. 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. The Exchange is able to
obtain information regarding trading in the Shares, the physical
commodities included in, or options, futures or options on futures on,
Shares through ETP Holders, in connection with such ETP Holders'
proprietary or customer trades which they effect through ETP Holders on
any relevant market. The Exchange can obtain market surveillance
information, including customer identity information, with respect to
transactions occurring on the NYMEX, CME and COMEX in that CME Group,
Inc., the parent company of NYMEX, CME and COMEX, is a member of the
Intermarket Surveillance Group (``ISG'').\25\ In addition, ICE is a
member of ISG, and the Exchange, therefore, can obtain market
surveillance information from such exchange.
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\25\ For a list of the current members of ISG, see http://www.isgportal.org. The Exchange may obtain information from futures
exchanges with which the Exchange has entered into a surveillance
sharing agreement or that are ISG members. The Exchange notes that
not all components of the 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.
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In addition, for components traded on exchanges, not more than 10%
of the weight of a Fund's portfolio in the aggregate shall consist of
components whose principal trading market is not a member of ISG or is
a market with which the Exchange does not have a comprehensive
surveillance sharing agreement.
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 of the special characteristics
and risks
[[Page 1487]]
associated with trading the Shares. Specifically, the Information
Bulletin will discuss the following: (1) The risks involved in trading
the Shares during the Opening and Late Trading Sessions when an updated
IIV will not be calculated or publicly disseminated; (2) the procedures
for purchases and redemptions of Shares in Creation Baskets and
Redemption Baskets (and that Shares are not individually redeemable);
(3) 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; (4) how information
regarding the IIV 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 Information Bulletin will advise ETP Holders,
prior to the commencement of trading, of the prospectus delivery
requirements applicable to the Funds. The Exchange notes that investors
purchasing Shares directly from the Funds will receive a Prospectus.
ETP Holders purchasing Shares from the Funds for resale to investors
will deliver a Prospectus to such investors. The Information Bulletin
will also discuss any exemptive, no-action and interpretive relief
granted by the Commission from any rules under the Act.
The Information Bulletin will further advise ETP Holders that FINRA
has implemented increased customer margin requirements applicable to
leveraged ETFs (which include the Shares) and options on leveraged
ETFs, as described in FINRA Regulatory Notices 09-53 (August 2009) and
09-65 (November 2009).
In addition, the Information Bulletin will reference that the Funds
are subject to various fees and expenses described in the Registration
Statements. The Information Bulletin will also reference that the CFTC
has regulatory jurisdiction over the trading of futures contracts
traded on U.S. markets.
The Information Bulletin will also disclose the trading hours of
the Shares of the Funds and that the NAV for the Shares is calculated
after 4 p.m. E.T. each trading day. The Bulletin will disclose that
information about the Shares of the Funds is publicly available on the
Funds' Web site.
2. Statutory Basis
The proposed rule change is consistent with Section 6(b) of the
Act,\26\ in general, and furthers the objectives of Section
6(b)(5),\27\ in particular, in that it is designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to foster cooperation and coordination
with persons engaged in facilitating transactions in securities, and to
remove impediments to and perfect the mechanism of a free and open
market and a national market system. The Exchange believes that the
proposed rule change will facilitate the listing and trading of an
additional type of exchange-traded product that will enhance
competition among market participants, to the benefit of investors and
the marketplace. In addition, the listing and trading criteria set
forth in Rule 8.200 are intended to protect investors and the public
interest.
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\26\ 15 U.S.C. 78f(b).
\27\ 15 U.S.C. 78f(b)(5).
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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 purposes of the Act.
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 (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 e-mail to [email protected]. Please include
File Number SR-NYSEArca-2010-121 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-2010-121. This
file number should be included on the subject line if e-mail 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 20549-1090 on official business days
between 10 a.m. and 3 p.m. Copies of the filing will also be available
for inspection and copying at the Exchange's principal office. 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-2010-121 and should
be submitted on or before January 31, 2011.
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\28\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\28\
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-162 Filed 1-7-11; 8:45 am]
BILLING CODE 8011-01-P