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Federal Register / Vol. 86, No. 161 / Tuesday, August 24, 2021 / Notices
inherent in the ETP structure because the ETP shares intra-day market price fluctuates in response to standard supply/demand dynamics during the trading day. Due to this fluctuation, the ETPs intra-day market price may not equal the actual value of ETPs underlying holdings that would form the basis of the NAV. Accordingly, authorized participants can arbitrage this difference and make a profit because they can trade directly with the ETP at NAV 4 as well as on the market at market-determined prices. The expected result of the arbitrage activity is that the market value of the ETP
moves back in line with the ETPs NAV
per share and investors are able to buy ETP shares on an exchange that is close to the ETPs NAV per share. The arbitrage mechanism is important because it provides a means to maintain a close tie between market price and NAV per share of the ETP throughout the day and on market close, thereby helping to ensure that ETP investors are treated equitably when buying and selling fund shares.
In order for the arbitrage mechanism described above to operate efficiently, market participants need to be able to hedge their intra-day risk effectively and estimate, with high accuracy, the value of the ETPs holdings, such that it can then observe instances when the value of such holdings, on a per-share basis, is higher or lower than the current trading price of the shares on an exchange. Principal aspects of the ETP
structure that facilitate these two processes are: i Timing of the NAV
strike and creation/redemption order window; and ii the volume of information available regarding the underlying holdings of the ETP, from which the authorized participant can estimate the ETPs NAV per share at any given time. With respect to the former, if an ETP can offer a more than one opportunity to lock in the purchase price of the ETP i.e., shorten the duration of the market risk that the authorized participant is bearing, the Exchange believes that the arbitrage mechanism will operate more efficiently, resulting in tighter spreads for the trading of the ETP shares.
Additionally, with respect to information dissemination, in general, the more information that is available to assist the market participants in estimating the value of the funds holdings, the better the arbitrage mechanism will operate with respect to 4 An open-end fund is required by law to redeem its securities on demand from shareholders at a price approximately the proportionate share of the funds NAV at the time of redemption. See 15
U.S.C. 80a22d.

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the Tracking Fund Shares. In the case of Tracking Fund Shares, the applicable ETP disseminates various information to achieve that goal, while not publishing a full list of fund holdings daily. First, as noted in the Initial Filing, each Fund will disclose its respective Fund Portfolio 5 including the name, identifier, market value and weight of each security and instrument in the portfolio, at a minimum within at least 60 days following the end of every fiscal quarter.6 Additionally, the Tracking Basket 7 also referred to as the substitute basket for each Fund will be publicly disseminated at least once daily.8 The Tracking Basket is designed to closely track the daily performance of the Fund, but is not fully-representative of the Fund Portfolio. The Tracking Basket often will include a significant percentage of the securities held in the Fund Portfolio, but it will exclude or modify the weightings of certain securities held in the Fund Portfolio, such as those securities that the Funds portfolio managers are actively looking to purchase or sell, or securities which, if disclosed, could increase the risk of front-running of free-riding. The Tracking Basket may also include cash.
Lastly, the issuer of the Funds represented that the NAV per share for each of the Funds will be calculated daily along with certain metrics, including the premium or discount between NAV and final trading price of the Shares and information about how well the performance of the Tracking Basket has correlated with the performance of the Fund Portfolio.9
While nothing in the Initial Filing, the Exemptive Relief, or Rule 14.11m requires the Funds to disseminate an intraday indicative value IIV, both Funds disseminate an IIV as such dissemination is not prohibited by the Initial Filing, Exemptive Relief or Rule 5 The term Fund Portfolio means the identities and quantities of the securities and other assets held by the Investment Company that will form the basis for the Investment Companys calculation of net asset value at the end of the business day. See Exchange Rule 14.11m3B.
6 See Exchange Rule 14.11m4Bii.
7 The term Tracking Basket means the identities and quantities of the securities and other assets included in a basket that is designed to closely track the daily performance of the Fund Portfolio, as provided in the exemptive relief under the Investment Company Act of 1940 applicable to a series of Tracking Fund Shares the Exemptive Relief. The website for each series of Tracking Fund Shares shall disclose the following information regarding the Tracking Basket as required under this Rule 14.11m, to the extent applicable: i Ticker symbol; ii CUSIP or other identifier; iii Description of holding; iv Quantity of each security or other asset held; v and Percentage weight of the holding in the portfolio.
8 See Exchange Rule 14.11m4Bi.
9 See Exchange Rule 14.11m4Aii.

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14.11m.10 The IIV refers to an intraday estimate of a funds NAV per share, and is calculated based on the valuation of Fund Portfolio holdings from the prior Business Day, and accounting for intraday price movements for such holdings.
The IIV is disseminated by each Fund every second during Regular Trading Hours.11 Due to the accounting method for trading activity for the Funds i.e., T+1 accounting, the portfolio upon which the IIV is calculated is the same as the portfolio that would serve as the basis for the Intra-Day NAV strike.
Accordingly, it is expected that the IIV
disseminated at the same time that the Intra-Day NAV is struck would be identical e.g. the 12:00 p.m. Eastern Time IIV and an Intra-Day NAV struck at 12:00 p.m. Eastern Time would be the same. However, although the IIV
provides a great deal of price transparency to the market, it is not an official NAV of the Funds derived using the processes and governance designed to ensure an accurate and reliable calculation before dissemination.
Accordingly, an official NAV would, in concert with the IIV, provide a reliable verification and further clarity as to Fund portfolio pricing.12
In furtherance of the Funds objectives of tightening spreads in the trading of their shares and increasing the efficiency of the arbitrage mechanism, the Funds will strike one NAV during normal trading the Intra-Day NAV
and one NAV again at the close of trading at 4:00 p.m. ET the End-of-Day NAV and collectively with Intra-Day NAV, the Published NAVs. The Funds anticipate that the Intra-Day NAV
will be struck at 12:00 p.m. ET;
however, the Funds represent that the Intra-Day NAV may be struck at a predetermined, and publicly disclosed, time between 11:00 a.m. ET and 2 p.m.
ET. The timing of the Intra-Day NAV
will be disclosed in each Funds prospectus and will not change without prior notification to shareholders and the market in the form of a prospectus supplement. The Intra-Day NAV would be calculated based on the values of the 10 As noted above, nothing in the Initial Filing, the Exemptive Relief, or Rule 14.11m requires the Funds to disseminate an IIV; therefore, the Fund is not representing that it will in the future continue to disseminate an IIV for either or both of the Funds.
11 Regular Trading Hours refers to the time between 9:30 a.m. and 4:00 p.m. Eastern time. See Exchange Rule 1.5w.
12 Further, in the rare instances where there may be a delay or error in calculating the IIV the dissemination of the official Intra-Day NAV would alert the market to any disparity. As discussed herein, the calculation of an official NAV takes more time to disseminate than the IIV, reflecting the robust verification and validation processes employed.

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