Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change Related to the 2x Long VIX Futures ETF and the -1x Short VIX Futures ETF

<NOTICE> SECURITIES AND EXCHANGE COMMISSION <DEPDOC>[Release No. 34-103659; File No. SR-CboeBZX-2025-059]</DEPDOC> <SUBJECT>Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change Related to the 2x Long VIX Futures ETF and the -1x Short VIX Futures ETF</SUBJECT> <DATE>August 7, 2025.</DATE> On March 21, 2025, Cboe BZX Exchange, Inc. (“BZX” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”)  <SU>1</SU> <FTREF/> and Rule 19b-4 thereunder, a proposed rule change to amend certain representations relating to the 2x Long VIX Futures ETF and the -1x Short VIX Futures ETF (each a “Fund,” and collectively, the “Funds”), shares of which have been approved by the Commission to list and trade on the Exchange as Trust Issued Receipts pursuant to BZX Rule 14.11(f)(4). The proposed rule change was published for comment in the <E T="04">Federal Register</E> on May 9, 2025. <SU>3</SU> <FTREF/> <FTNT> <SU>1</SU>  15 U.S.C. 78s(b)(1). </FTNT> <FTNT> <SU>2</SU>  17 CFR 240.19b-4. </FTNT> <FTNT> <SU>3</SU>   <E T="03">See</E> Securities Exchange Act Release No. 102991 (May 5, 2025), 90 FR 19741 (“Notice”). The Commission has not received any comments regarding the proposed rule change. </FTNT> On June 16, 2025, pursuant to Section 19(b)(2) of the Act, <SU>4</SU> <FTREF/> the Commission designated a longer period within which to approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether to disapprove the proposed rule change. <SU>5</SU> <FTREF/> <FTNT> <SU>4</SU>  15 U.S.C. 78s(b)(2). </FTNT> <FTNT> <SU>5</SU>   <E T="03">See</E> Securities Exchange Act Release No. 103274, 90 FR 26352 (June 20, 2025) (designating August 7, 2025, as the date by which the Commission shall either approve, disapprove, or institute proceedings to determine whether to disapprove the proposed rule change). </FTNT> The Commission is publishing this order to solicit comments on the proposed rule change from interested persons and to institute proceedings under Section 19(b)(2)(B) of the Act  <SU>6</SU> <FTREF/> to determine whether to approve or disapprove the proposed rule change. <FTNT> <SU>6</SU>  15 U.S.C. 78s(b)(2)(B). </FTNT> <HD SOURCE="HD1">I. Description of the Proposal</HD> The Commission approved the listing and trading of the Funds on October 1, 2021. <SU>7</SU> <FTREF/> <FTNT> <SU>7</SU>   <E T="03">See</E> Securities Exchange Act Release Nos. 93229 (Oct. 1, 2021), 86 FR 55873 (Oct. 7, 2021) (Order Setting Aside Action by Delegated Authority and Approving a Proposed Rule Change, as Modified by Amendment Nos. 2 and 4, To List and Trade Shares of the 2x Long VIX Futures ETF Under BZX Rule 14.11(f)(4)(Trust Issued Receipts)) (SR-CboeBZX-2020-053) (“Order Approving UVIX”); <E T="03">and</E> 93229 (Oct. 1, 2021), 86 FR 55881 (Oct. 7, 2021) (Order Setting Aside Action by Delegated Authority and Approving a Proposed Rule Change, as Modified by Amendment Nos. 1 and 3, To List and Trade Shares of the -1x Short VIX Futures ETF Under BZX Rule 14.11(f)(4)(Trust Issued Receipts)) (SR-CboeBZX-2020-070) (“Order Approving SVIX,” and, together with the Order Approving UVIX, the “Approval Orders”). </FTNT> The Approval Orders include representations that Volatility Shares LLC (“Sponsor”) will limit the Funds' participation in Cboe Volatility Index (“VIX”) futures contracts traded on the Cboe Futures Exchange, Inc. (“CFE”) (“VIX Futures Contracts”) to no more than 10% during any “Rebalance Period,” defined as any fifteen minute period of continuous market trading. <SU>8</SU> <FTREF/> In the event that the Funds expect to hit the 10% threshold during the primary Rebalance Period from 3:45 p.m. to 4:00 p.m. ET, the Funds will extend their respective rebalances into additional Rebalance Periods and the Trade at Settlement market (each, an “Extended Rebalance Period”). <SU>9</SU> <FTREF/> Further, in the event that either Fund participates in an Extended Rebalance Period, each Fund represented that it will notify the Exchange and the Commission of such participation as soon as practicable, but no later than 9:00 a.m. ET on the trading day following the event. <SU>10</SU> <FTREF/> <FTNT> <SU>8</SU>   <E T="03">See</E> Order Approving SVIX, 86 FR at 55882; <E T="03">and</E> Order Approving UVIX, 86 FR at 55874. This restriction applies “across all exchange traded products based on VIX Futures Contracts (`VIX ETPs') that [the Sponsor] sponsors.” <E T="03">See</E> Order Approving SVIX, 86 FR at 55882; <E T="03">and</E> Order Approving UVIX, 86 FR at 55874. </FTNT> <FTNT> <SU>9</SU>   <E T="03">See</E> Order Approving SVIX, 86 FR at 55882-83; <E T="03">and</E> Order Approving UVIX, 86 FR at 55874. </FTNT> <FTNT> <SU>10</SU>   <E T="03">See</E> Order Approving SVIX, 86 FR at 55883; <E T="03">and</E> Order Approving UVIX, 86 FR at 55874. </FTNT> The Exchange is proposing to eliminate the 10% participation cap for the Funds' participation in VIX Futures Contracts during any Rebalance Period as well as the representation that the Funds will notify the Exchange and the Commission of the Funds' participation in any Extended Rebalance Period. The Exchange proposes to instead provide, with respect to each Fund: <EXTRACT> The time and manner in which the Fund will rebalance its portfolio is defined by the Index methodology but may vary from the Index methodology depending upon market conditions and other circumstances including the potential impact of the rebalance on the price of the VIX Futures Contracts. To limit participation during periods of market illiquidity, the Sponsor, on any given day, may vary the manner and period over which all funds it sponsors are rebalanced, and as such, the manner and period over which the Fund is rebalanced. The Sponsor believes that the Fund will enter an Extended Rebalance Period most often during periods of extraordinary market conditions or illiquidity in VIX Futures Contracts. <SU>11</SU> <FTREF/> <FTNT> <SU>11</SU>   <E T="03">See</E> note 3, 90 FR at 19742-43. </FTNT> </EXTRACT> The Exchange states that Sponsor will continue to operate each Fund in a manner that seeks to minimize market impact across the Funds, and by way of example, notes that the Sponsor's products differ from previous and existing VIX ETPs by using a valuation method that is an average price over a longer time period instead of exclusively at the 4:00 p.m. ET settlement price, which it believes mitigates market impact. <SU>12</SU> <FTREF/> The Exchange represents that the Sponsor owes the Funds a fiduciary duty and operates the Funds accordingly. <SU>13</SU> <FTREF/> <FTNT> <SU>12</SU>   <E T="03">See</E> note 3, 90 FR at 19743. </FTNT> <FTNT> <SU>13</SU>  According to the Exchange, the Sponsor, as a commodity pool operator, owes a fiduciary duty to the commodity pools it operates, <E T="03">i.e.,</E> the Funds. <E T="03">See</E> Notice, <E T="03">supra</E> note 3, 90 FR at 19743. </FTNT> <HD SOURCE="HD1">II. Proceedings To Determine Whether To Approve or Disapprove SR-CboeBZX-2025-059 and Grounds for Disapproval Under Consideration</HD> The Commission is instituting proceedings pursuant to Section 19(b)(2)(B) of the Act  <SU>14</SU> <FTREF/> to determine whether the proposed rule change should be approved or disapproved. Institution of such proceedings is appropriate at this time in view of the legal and policy issues raised by the proposed rule change. Institution of proceedings does not indicate that the Commission has reached any conclusions with respect to any of the issues involved. Rather, as described below, the Commission seeks and encourages interested persons to provide comments on the proposed rule change. <FTNT> <SU>14</SU>  15 U.S.C. 78s(b)(2)(B). </FTNT> Pursuant to Section 19(b)(2)(B) of the Act, <SU>15</SU> <FTREF/> the Commission is providing notice of the grounds for disapproval under consideration. The Commission is instituting proceedings to allow for additional analysis of the proposal's consistency with Section 6(b)(5) of the Act, which requires, among other things, that the rules of a national securities exchange be “designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade,” and “to protect investors and the public interest.”  <SU>16</SU> <FTREF/> <FTNT> <SU>15</SU>   <E T="03">Id.</E> </FTNT> <FTNT> <SU>16</SU>  15 U.S.C. 78f(b)(5). </FTNT> In its assessment of the original proposals, the Commission considered the potential for market disruption during periods with large percentage increases in volatility and, because of the potential for large, sudden moves in VIX levels, the potential for large spikes in rebalancing demand for VIX ETPs. <SU>17</SU> <FTREF/> In its Approval Orders, the Commission concluded that, based on the record at the time, the Exchange's proposals were reasonably designed to help mitigate the potential market impact on the Funds' daily rebalance demand during periods when there are large percentage increases in volatility. <SU>18</SU> <FTREF/> Specifically, the Commission concluded that the rebalance design of the Funds may help distribute rebalancing volume, and that the 10% participation cap strikes an appropriate balance between allowing the Funds to rebalance within a reasonably short period of time and managing the potential market impact of a large rebalance. <SU>19</SU> <FTREF/> <FTNT> <SU>17</SU>   <E T="03">See</E> Order Approving SVIX, 86 FR at 55884; <E T="03">and</E> Order Approving UVIX, 86 ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 17k characters. 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