[Federal Register Volume 84, Number 215 (Wednesday, November 6, 2019)]
[Notices]
[Pages 59900-59903]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-24189]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87437; File No. SR-NYSEArca-2019-62]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Amendment No. 1, and Order Granting Accelerated Approval of a
Proposed Rule Change, as Modified by Amendment No. 1, Relating to the
Listing and Trading of Shares of the Innovator MSCI EAFE Power Buffer
ETFs and Innovator MSCI Emerging Markets Power Buffer ETFs, Series of
the Innovator ETFs Trust, Under NYSE Arca Rule 8.600-E
October 31, 2019.
I. Introduction
On August 29, 2019, NYSE Arca, Inc. (``Exchange'' or ``NYSE Arca'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change
relating to the listing and trading of shares (``Shares'') of the
Innovator MSCI EAFE Power Buffer ETFs and Innovator MSCI Emerging
Markets Power Buffer ETFs (each a ``Fund'' and collectively the
``Funds''), series of the Innovator ETFs Trust (``Trust''), under NYSE
Arca Rule 8.600-E, which governs the listing and trading of Managed
Fund Shares. The proposed rule change was published for comment in the
Federal Register on September 18, 2019.\3\ On October 16, 2019, the
Exchange filed Amendment No. 1 to the proposed rule change, which
replaced and superseded the proposed rule change as originally
filed.\4\ The Commission has received no comments on the proposed rule
change. The Commission is publishing this notice to solicit comments on
Amendment No. 1 from interested persons, and is approving the proposed
rule change, as modified by Amendment No. 1, on an accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 86948 (September 12,
2019), 84 FR 49131.
\4\ In Amendment No. 1, the Exchange: (1) Clarified that it is
submitting this proposal in order to allow each Fund to hold listed
derivatives (i.e., FLEX and standardized options on the Indexes and
on ETFs that track the Indexes) in a manner that does not comply
with Commentary .01(d)(2) to NYSE Arca Rule 8.600-E; (2) clarified
the Funds' use of standardized options; (3) specified that while the
Funds will invest primarily in FLEX and standardized options, they
may also invest in cash and cash equivalents; and (4) made other
technical, clarifying, and conforming changes. Amendment No. 1 is
available at: https://www.sec.gov/comments/sr-nysearca-2019-62/srnysearca201962-6310013-193523.pdf.
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II. Description of the Proposed Rule Change, as Modified by Amendment
No. 1
The Exchange proposes to: (1) Permit the continued listing and
trading of Shares of the Innovator MSCI EAFE Power Buffer ETF (July
Series) and Innovator MSCI Emerging Markets Power Buffer ETF (July
Series); (2) list and trade Shares of up to an additional eleven
Innovator MSCI EAFE Power Buffer ETF Series of the Trust (``EAFE Power
Buffer Funds''); and (3) list and trade Shares of up to an additional
eleven Innovator MSCI Emerging Markets Power Buffer ETF Series of the
Trust (``Emerging Markets Power Buffer Funds'').\5\ Innovator Capital
Management, LLC (``Adviser'') is the investment adviser to the Funds
and Milliman Financial Risk Management LLC (``Sub-Adviser'') is the
sub-adviser.
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\5\ The Trust is registered with the Commission as an investment
company and has filed a registration statement on Form N-1A under
the Securities Act of 1933 and the Investment Company Act of 1940
for each of the Innovator MSCI EAFE Power Buffer ETF (July Series
and October Series) and Innovator MSCI Emerging Markets Power Buffer
ETF (July Series and October Series).
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The investment objective of the EAFE Power Buffer Funds is to
provide investors with returns that match those of the MSCI EAFE
Investable Market Index--Price Return (``MSCI EAFE Index'') over a
period of approximately one year, while providing a level of protection
from MSCI EAFE Index losses. The investment objective of the
[[Page 59901]]
Emerging Markets Power Buffer Funds is to provide investors with
returns that match those of the MSCI Emerging Markets Investable Market
Index--Price Return (``MSCI Emerging Markets Index'' and, together with
the MSCI EAFE Index, the ``Indexes'') over a period of approximately
one year, while providing a level of protection from MSCI Emerging
Markets Index losses.
In particular, the Funds are actively managed funds that employ a
defined outcome strategy \6\ that: (1) For the EAFE Power Buffer Funds,
seeks to provide investment returns during the outcome period that
match the gains of the MSCI EAFE Index, up to a maximized annual return
(``EAFE Cap Level''),\7\ while guarding against a decline in the MSCI
EAFE Index of the first 15% (``EAFE Power Buffer Strategy''); and (2)
for the Emerging Markets Power Buffer Funds, seeks to provide
investment returns during the outcome period that match the gains of
the MSCI Emerging Markets Index, up to a maximized annual return
(``Emerging Markets Cap Level''),\8\ while guarding against a decline
in the MSCI Emerging Markets Index of the first 15% (``Emerging Markets
Power Buffer Strategy'').
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\6\ Defined outcome strategies are designed to participate in
market gains and losses within pre-determined ranges over a
specified period (i.e., point to point). These outcomes are
predicated on the assumption that an investment vehicle employing
the strategy is held for the designated outcome periods.
\7\ The EAFE Cap Level will be determined with respect to each
EAFE Power Buffer Fund on the inception date of the EAFE Power
Buffer Fund and at the beginning of each outcome period and is
determined based on the price of the FLEX options acquired by the
EAFE Power Buffer Fund at that time. The EAFE Cap Level will be
determined only once at the beginning of each outcome period and not
within an outcome period.
\8\ The Emerging Markets Cap Level will be determined with
respect to each Emerging Markets Power Buffer Fund on the inception
date of the Emerging Markets Power Buffer Fund and at the beginning
of each outcome period and is determined based on the price of the
FLEX options acquired by the Emerging Markets Power Buffer Fund at
that time. The Emerging Markets Cap Level will be determined only
once at the beginning of each outcome period and not within an
outcome period.
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More specifically, pursuant to the EAFE Power Buffer Strategy, each
EAFE Power Buffer Fund's portfolio managers will seek to produce the
following outcomes during the outcome period:
If the MSCI EAFE Index appreciates over the outcome
period, the EAFE Power Buffer Fund will seek to provide shareholders
with a total return that matches that of the MSCI EAFE Index, up to and
including the EAFE Cap Level;
If the MSCI EAFE Index depreciates over the outcome period
by 15% or less, the EAFE Power Buffer Fund will seek to provide a total
return of zero; and
If the MSCI EAFE Index decreases over the outcome period
by more than 15%, the EAFE Power Buffer Fund will seek to provide a
total return loss that is 15% less than the percentage loss on the MSCI
EAFE Index with a maximum loss of approximately 85%.
In addition, pursuant to the Emerging Markets Power Buffer
Strategy, each Emerging Markets Power Buffer Fund's portfolio managers
will seek to produce the following outcomes during the outcome period:
If the MSCI Emerging Markets Index appreciates over the
outcome period, the Emerging Markets Power Buffer Fund will seek to
provide shareholders with a total return that matches that of the MSCI
Emerging Markets Index, up to and including the Emerging Markets Cap
Level;
If the MSCI Emerging Markets Index depreciates over the
outcome period by 15% or less, the Emerging Markets Power Buffer Fund
will seek to provide a total return of zero;
If the MSCI Emerging Markets Index decreases over the
outcome period by more than 15%, the Emerging Markets Power Buffer Fund
will seek to provide a total return loss that is 15% less than the
percentage loss on the MSCI Emerging Markets Index with a maximum loss
of approximately 85%.
Under normal market conditions: \9\ (1) Each EAFE Power Buffer Fund
will invest primarily in FLEX options or standardized options contracts
listed on a U.S. exchange that reference either the MSCI EAFE Index or
ETFs \10\ that track the MSCI EAFE Index; and (2) each Emerging Markets
Power Buffer Fund will invest primarily in FLEX options or standardized
options contracts listed on a U.S. exchange that reference either the
MSCI Emerging Markets Index or ETFs \11\ that track the MSCI Emerging
Markets Index.\12\ Each of the Funds may invest its net assets (in the
aggregate) in other investments (i.e., cash or cash equivalents \13\)
which the Adviser or Sub-Adviser believes will help each Fund to meet
its investment objective and that will be disclosed at the end of each
trading day.
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\9\ The term ``normal market conditions'' is defined in NYSE
Arca Rule 8.600-E(c)(5).
\10\ For purposes of this proposal, the term ``ETFs'' means
Investment Company Units (as described in NYSE Arca Rule 5.2-
E(j)(3)), Portfolio Depositary Receipts (as described in NYSE Arca
Rule 8.100-E), and Managed Fund Shares (as described in NYSE Arca
Rule 8.600-E). All ETFs will be listed and traded in the U.S. on a
national securities exchange.
\11\ See supra note 10.
\12\ Options on the Indexes are traded on Cboe Exchange, Inc.
(``Cboe Options''). Options on ETFs based on the Indexes are listed
and traded in the U.S. on national securities exchanges. The
Exchange, Cboe Options, and all other national securities exchanges
are members of the Intermarket Surveillance Group (``ISG'').
Moreover, Cboe Options and the Exchange are members of the Options
Regulatory Surveillance Authority.
\13\ Cash equivalents are the short-term instruments enumerated
in Commentary .01(c) to NYSE Arca Rule 8.600-E.
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According to the Exchange, it is submitting this proposal in order
to allow each Fund to hold listed derivatives (i.e., FLEX and
standardized options on the Indexes and on ETFs that track the Indexes)
in a manner that does not comply with Commentary .01(d)(2) to NYSE Arca
Rule 8.600-E. Commentary .01(d)(2) to NYSE Arca Rule 8.600-E provides
that the aggregate gross notional value of listed derivatives based on
any five or fewer underlying reference assets shall not exceed 65% of
the weight of the portfolio (including gross notional exposures), and
the aggregate gross notional value of listed derivatives based on any
single underlying reference asset shall not exceed 30% of the weight of
the portfolio (including gross notional exposures).
III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change, as modified by Amendment No. 1, is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a national securities exchange.\14\ In particular, the
Commission finds that the proposed rule change, as modified by
Amendment No. 1, is consistent with Section 6(b)(5) of the Act,\15\
which requires, among other things, that the Exchange's rules be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general, to protect investors and the public
interest. The Commission also finds that the proposal is consistent
with Section 11A(a)(1)(C)(iii) of the Act,\16\ which sets forth
Congress' finding that it is in the public interest and appropriate for
the protection of investors and the maintenance of fair and orderly
markets to assure the availability to brokers, dealers and investors of
information
[[Page 59902]]
with respect to quotations for and transactions in securities.
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\14\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\15\ 15 U.S.C. 78f(b)(5).
\16\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
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According to the Exchange, intra-day and closing price information
regarding Index options and ETF options is available from the Options
Price Reporting Authority, Cboe Options' website, and from major market
data vendors. FINRA's Trade Reporting and Compliance Engine (``TRACE'')
will be a source of price information for certain fixed income
securities to the extent transactions in such securities are reported
to TRACE. Price information regarding U.S. government securities and
other cash equivalents generally may be obtained from brokers and
dealers who make markets in such securities or through nationally
recognized pricing services through subscription agreements.
Information regarding market price and trading volume of the Shares
will be continually available on a real-time basis throughout the day
on brokers' computer screens and other electronic services. Information
regarding the previous day's closing price and trading volume
information for the Shares will be published daily in the financial
section of newspapers. Quotation and last sale information for the
Shares will be available via the Consolidated Tape Association high-
speed line. In addition, the Portfolio Indicative Value, as defined in
NYSE Arca Rule 8.600-E(c)(3), will be widely disseminated by one or
more major market data vendors at least every 15 seconds during the
Core Trading Session.
The Commission also believes that the proposal is reasonably
designed to promote fair disclosure of information that may be
necessary to price the Shares appropriately and to prevent trading when
a reasonable degree of transparency cannot be assured. Under NYSE Arca
Rule 8.600-E(d)(2)(D), if the Exchange becomes aware that the net asset
value (``NAV'') or the Disclosed Portfolio (as defined in NYSE Arca
Rule 8.600-E(c)(2)) is not disseminated to all market participants at
the same time, the Exchange is required to halt trading in such series
of Managed Fund Shares. In addition, the Exchange represents that if a
Fund is not in compliance with the applicable listing requirements, the
Exchange will commence delisting procedures under NYSE Arca Rule 5.5-
E(m). The Exchange also states that it has a general policy prohibiting
the distribution of material, non-public information by its employees.
Further, the issuer currently provides and maintains for the July
Series, and will provide and maintain for any future series of a Fund,
a publicly available web tool on its website that provides existing and
prospective shareholders with certain information to help inform
investment decisions. The information provided includes the start and
end dates of the current outcome period, the time remaining in the
outcome period, the Funds' current NAV, each Fund's cap for the outcome
period and the maximum investment gain available up to the cap for a
shareholder purchasing Shares at the current NAV. The web tool also
provides information regarding each Fund's buffer. This information
includes the remaining buffer available for a shareholder purchasing
Shares at the current NAV or the amount of losses that a shareholder
purchasing Shares at the current NAV would incur before benefitting
from the protection of the buffer.
The Shares do not qualify for generic listing because the Funds
will not satisfy the requirements of Commentary .01(d)(2) to NYSE Arca
Rule 8.600-E that the aggregate gross notional value of listed
derivatives based on any five or fewer underlying reference assets
shall not exceed 65% of the weight of the portfolio (including gross
notional exposures) and the aggregate gross notional value of listed
derivatives based on any single underlying reference asset shall not
exceed 30% of the weight of the portfolio (including gross notional
exposures). As noted above, under normal market conditions: (1) Each
EAFE Power Buffer Fund will invest primarily in FLEX Options or
standardized options contracts listed on a U.S. exchange that reference
either the MSCI EAFE Index or ETFs that track the MSCI EAFE Index; and
(2) each Emerging Markets Power Buffer Fund will invest primarily in
FLEX Options or standardized options contracts listed on a U.S.
exchange that reference either the MSCI Emerging Markets Index or ETFs
that track the MSCI Emerging Markets Index. The Commission notes that,
although the Funds' holdings in these listed derivatives will not meet
the requirements of Commentary .01(d)(2) to NYSE Arca Rule 8.600-E, the
Indexes are broad-based; the ETFs will be listed and traded in the U.S.
on national securities exchanges; and all Index and ETF options
contacts held by the Funds 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, all of which
help to mitigate concerns about the prices of the Shares being
susceptible to manipulation.
Additionally, in support of this proposal, the Exchange represents
that:
(1) With the exception of the requirements of Commentary .01(d)(2),
each Fund will comply with the initial and continued listing standards
under NYSE Arca Rule 8.600-E.
(2) Trading in the Shares will be subject to the existing trading
surveillances, administered by FINRA on behalf of the Exchange, or by
regulatory staff of the Exchange, which are designed to detect
violations of Exchange rules and applicable federal securities laws.
(3) For initial and continued listing, the Funds will be in
compliance with Rule 10A-3 under the Act,\17\ as provided by NYSE Arca
Rule 5.3-E.
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\17\ 17 CFR 240.10A-3.
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(4) With respect to each of the proposed additional eleven series
of each Fund, a minimum of 100,000 Shares will be outstanding at the
commencement of trading on the Exchange.
This approval order is based on all of the Exchange's statements
and representations, including those set forth above and in Amendment
No. 1.
IV. Solicitation of Comments on Amendment No. 1 to the Proposed Rule
Change
Interested persons are invited to submit written data, views, and
arguments concerning whether Amendment No. 1 is consistent with the
Act. Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NYSEArca-2019-62 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSEArca-2019-62. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than
[[Page 59903]]
those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street NE,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change. Persons submitting
comments are cautioned that we do not redact or edit personal
identifying information from comment submissions. You should submit
only information that you wish to make available publicly. All
submissions should refer to File Number SR-NYSEArca-2019-62, and should
be submitted on or before November 27, 2019.
V. Accelerated Approval of Proposed Rule Change, as Modified by
Amendment No. 1
The Commission finds good cause to approve the proposed rule
change, as modified by Amendment No. 1, prior to the thirtieth day
after the date of publication of notice of the filing of Amendment No.
1 in the Federal Register. As discussed above, in Amendment No. 1, the
Exchange: (1) Clarified that it is submitting this proposal in order to
allow each Fund to hold listed derivatives (i.e., FLEX and standardized
options on the Indexes and on ETFs that track the Indexes) in a manner
that does not comply with Commentary .01(d)(2) to NYSE Arca Rule 8.600-
E; (2) clarified the Funds' use of standardized options; (3) specified
that while the Funds will invest primarily in FLEX and standardized
options, they may also invest in cash and cash equivalents; and (4)
made other technical, clarifying, and conforming changes. The
Commission believes that Amendment No. 1 does not raise any novel
regulatory issues and provides additional clarity to the proposal.
Accordingly, the Commission finds good cause, pursuant to Section
19(b)(2) of the Act,\18\ to approve the proposed rule change, as
modified by Amendment No. 1, on an accelerated basis.
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\18\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\19\ that the proposed rule change (SR-NYSEArca-2019-62), as
modified by Amendment No. 1, be, and it hereby is, approved on an
accelerated basis.
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\19\ Id.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
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\20\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-24189 Filed 11-5-19; 8:45 am]
BILLING CODE 8011-01-P