[Federal Register Volume 77, Number 250 (Monday, December 31, 2012)]
[Notices]
[Pages 77134-77137]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-31246]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68517; File No. SR-Phlx-2012-136]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by NASDAQ OMX PHLX LLC Relating 
to the Distribution of Auction Messages

December 21, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\, and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on December 11, 2012, NASDAQ OMX PHLX LLC (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') 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 amend Rule 1080(m) to provide for the 
distribution of auction messages for certain orders.
    The Exchange proposes this amendment become operative on January 2, 
2013.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://www.nasdaqtrader.com/micro.aspx?id=PHLXRulefilings, 
at the principal office of the Exchange, and at the Commission's Public 
Reference Room.

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 Exchange 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 these 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 aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to amend Rule 1080 
titled ``Phlx XL and Phlx XL II,'' which describes the Exchange's fully 
automated options trading system.\3\ Specifically, the Exchange seeks 
to amend an aspect of the order handling rules related to routing 
orders to away markets in Rule 1080(m).
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    \3\ This proposal refers to ``PHLX XL[supreg]'' as the 
Exchange's automated options trading system. In May 2009 the 
Exchange enhanced the system and adopted corresponding rules 
referring to the system as ``Phlx XL II.'' See Securities Exchange 
Act Release No. 59995 (May 28, 2009), 74 FR 26750 (June 3, 2009) 
(SR-Phlx-2009-32). The Exchange intends to submit a separate 
technical proposed rule change that would change all references to 
the system from ``Phlx XL II'' to ``PHLX XL'' for branding purposes.
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    Currently, when the Exchange's disseminated bid or offer (``PBBO'') 
is inferior to the away best bid or offer (``ABBO'') the Phlx XL II 
system will route FIND \4\ and SRCH \5\ Orders with no other 
contingencies as specified in Rule 1080(m) and will place contracts 
designated as not available for routing (``DNR'') \6\ on the Phlx book.
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    \4\ A FIND order is an order that is routable upon receipt 
during open trading. Only a customer FIND order on the Phlx XL II 
book, whether it is received prior to the opening or it is a GTC 
FIND order from a prior day, may be routed as part of the Opening 
Process. Non-customer FIND orders are not eligible for routing 
during the Opening Process. Once the Opening Process is complete, 
any FIND order is either eligible to trade at the Phlx price or 
placed on the Phlx book either at its limit price or at a price that 
is one Minimum Price Variation (``MPV'') from the ABBO price if it 
would otherwise lock or cross the ABBO. Such FIND order will not be 
eligible for routing until the next time the option series is 
subject to a new Opening Process. See Rule 1080 (m)(iv)(B).
    \5\ A SRCH order is a customer order that is routable at any 
time. A SRCH order on the Phlx XL II book during the Opening Process 
(including a re-opening following a trading halt), whether it is 
received prior to the opening or it is a GTC SRCH order from a prior 
day, may be routed as part of the Opening Process. Once the Opening 
Process is complete, a SRCH order is eligible either to: (1) Trade 
at the Phlx price if that price is equal to or better than the ABBO 
or, if the ABBO is better than the Phlx price, orders have been 
routed to better priced markets for their full size; or (2) be 
routed to better priced markets if the ABBO price is the best price, 
and/or (3) be placed on the Phlx XL II book at its limit price if 
not participating in the Phlx opening at the opening price and not 
locking or crossing the ABBO. Once on the book, the SRCH order is 
eligible for routing if it is locked or crossed by an away market. 
See Rule 1080 (m)(C).
    \6\ A DNR order will never be routed outside of Phlx regardless 
of the prices displayed by away markets. See Rule 1080(m)(iv)(A). In 
addition, responses may not trade through the away market. See Rule 
1084.
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    With respect to routable FIND and SRCH orders, today the Phlx XL II 
system has a Route Timer which provides for a system pause for a period 
not to exceed one second.\7\ When the Route Timer is initiated, Phlx XL 
II participants and other market participants are provided an 
opportunity to interact with the FIND or SRCH order. During the Route 
Timer, the FIND or SRCH order is included in the PBBO at a price one 
MPV away from the ABBO. If, during the Route Timer, any new interest 
arrives opposite the FIND or SRCH order that is equal to or better than 
the ABBO price, the FIND or SRCH order will trade against such new 
interest at the ABBO price.\8\
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    \7\ See Rule 1080(m)(iv)(B) and (C).
    \8\ Id.
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    At this time, the Exchange is proposing to expose orders by 
broadcasting a notification to all Phlx XL II participants and other 
market participants who have elected to receive such notifications \9\ 
at the time that a FIND or SRCH order is received by Phlx

[[Page 77135]]

XL II for a time period not to exceed the Route Timer.\10\ In the 
instance that the ABBO changes during the Route Timer, the Exchange 
would broadcast an updated notification with the new price. Once the 
Route Timer commences, as is the case today, Phlx XL II market 
participants and other market participants would be able to submit new 
interest opposite the FIND or SRCH order that is equal to or better 
than the ABBO price, the FIND or SRCH order will trade against such new 
interest at the ABBO price. Today, if, at the end of the Route Timer, 
the ABBO is still the best price, the FIND or SRCH order, will route to 
the away market(s) whose disseminated price is better than the PBBO, up 
to a size equal to the lesser of either: (a) the away markets' size, or 
(b) the remaining size of the SRCH order, as is the case today.\11\ 
This would not change with this proposal.
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    \9\ The Exchange will broadcast the notifications as specified 
below in the filing. Only subscribers to certain data feeds will 
receive the notifications. The notification will identify the size 
and the side of the market in addition to the exposed price.
    \10\ Pursuant to Rule 1080(m)(iv), the Route Timer will not 
exceed one second.
    \11\ If the FIND or SRCH order still has remaining size after 
such routing, it may (1) trade at the next PBBO price (or prices) if 
the order price is locking or crossing that price (or prices) up to 
the ABBO price, and/or (2) be entered into the Phlx XL II book at 
its limit price if not locking or crossing the Phlx price or the 
ABBO. The Phlx XL II system will route and execute contracts 
contemporaneously at the end of the Route Timer. Once on the book, 
the SRCH order is eligible for routing if it is locked or crossed by 
an away market.
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    The Exchange's proposal to expose the order by way of a 
broadcasting a notification to Phlx XL II participants and other market 
participants is an amendment to the Exchange's current rules. The 
Exchange is not proposing to amend any other functionality in Rule 
1080(m) related to FIND or SRCH orders. Today, the Exchange executes 
any responses at a price at or better than the ABBO on a first come, 
first served basis prior to routing the order to an away market in 
accordance with the rules currently in effect in Rule 1080(m). If a 
response trades against new interest, the Route Timer would terminate 
early if the order is fully executed. This amendment is similar to 
rules at other options exchanges.\12\
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    \12\ Currently the Chicago Board Options Exchange, Incorporated 
(``CBOE'') and the International Securities Exchange LLC (``ISE'') 
expose orders during an auction period not to exceed one second.
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    By way of an example, today assuming that Phlx's best offer is 1.22 
for 200 contracts and the NBO is 1.19 for 10 contracts with one other 
market disseminating a 1.20 offer for 20 contracts. An order to buy 100 
contracts at 1.22 is received. The order would be broadcast through a 
notification message at 1.19. A market participant submits a response 
to trade 10 contracts at 1.19. As a result 10 contracts trade against 
market participant A at 1.19 (leaving 90 contracts on the order). 
During the remaining time on the Route Timer market participant B 
submits a response to trade 20 contracts at 1.21. As soon as the Route 
Timer concludes (assuming away market prices have not changed), the 
Exchange will simultaneously: route an ISO to buy 10 contracts at 1.19 
to the NBBO market, route an ISO to buy 20 contracts at 1.20 to the 
market displaying the 1.20 offer, execute 20 contracts at 1.21 market 
participant B, and execute the remaining 40 contracts against the 
Exchange's 1.22 offer.
    With respect to non-routable DNR orders, today a DNR order may 
execute at a price equal to or better than, but not inferior to, the 
best away market price but, if that best away market remains, the DNR 
order will remain in the Phlx book and be displayed at a price one 
minimum price variation inferior to that away best bid/offer.\13\ An 
incoming order interacting with such a resting DNR order receives the 
best away market price.\14\ The Exchange is not proposing to change 
this functionality.
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    \13\ See Rule 1080(m)(iv)(A).
    \14\ Should the best away market change its price, or move to an 
inferior price level, the DNR order will automatically re-price from 
its one minimum price variation inferior to the original away best 
bid/offer price to one minimum trading increment away from the new 
away best bid/offer price or its original limit price. Also, once 
priced at its original limit price, it will remain at that price 
until executed or cancelled.
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    Similar to routable orders, the Exchange is proposing to expose the 
DNR order, upon receipt, to Phlx XL II participants and other market 
participants in a manner similar to FIND and SRCH orders. The Exchange 
proposes to expose the order by broadcasting a notification to Phlx XL 
II participants and other market participants. In the instance that the 
best away market changes to an inferior price, the DNR order 
automatically re-prices again. If, and only if, after repricing, the 
DNR order is still not displayed at its original limit price the 
Exchange will expose the order again to Phlx XL II participants and 
other market participants. The DNR order would remain on the book until 
executed or cancelled, and not route to an away market, pursuant to 
current Exchange rules. Any responses received to the exposed order 
would be executed in accordance with the current text of Rule 
1080(m)(iv)(A).\15\
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    \15\ See also Rule 1080(c)(ii).
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    By way of an example, today assuming that the PBBO is 1.00 bid/2.00 
offer and the NBBO is 1.00 bid/1.20 offer and a DNR order to buy 100 
contracts for 1.50 is received. The order would be broadcast through a 
notification message at 1.20 and the PBBO would be updated to 1.19 bid/
2.00 offer. If the NBBO moved to 1.00 bid/1.50 offer, and the DNR order 
was not completely filled, the Exchange would reprice the DNR order and 
update the PBBO to 1.49 bid/2.00 offer and broadcast another 
notification message at 1.50. The Exchange would expose the order in 
this instance because the re-priced DNR order locked the market. The 
Exchange would also expose the repriced DNR order in the instance that 
the order crossed the market. For example, assuming that the PBBO is 
1.00 bid/2.00 offer and the NBBO is 1.00 bid/1.20 offer and a DNR order 
to buy 100 contracts for 1.50 is received. The order would be broadcast 
through a notification message at 1.20. If the NBBO moved to 1.00 bid/
1.40 offer, and the order was not completely filled, the Exchange would 
reprice the DNR order and update the PBBO to 1.39 bid/2.00 offer and 
rebroadcast the message at 1.40. If the NBBO moved to 1.00 bid/1.53 
offer, and the order was not completely filled, the Exchange would 
reprice the DNR order to its limit of 1.50 and update the PBBO to 1.50 
bid/2.00 offer. The DNR order, since posted at its limit, will not be 
rebroadcast and will remain on the book until it is either executed or 
cancelled. As previously stated, the Exchange is not proposing to add 
any additional functionality to the Phlx XL II system.
    This proposal only seeks to expose certain orders by broadcasting a 
notification message to all Phlx XL II participants and market 
participants that subscribe to certain data feeds. The Exchange would 
send the notification message which exposes the order through both the 
TOPO Plus Order feed \16\ and the Phlx Depth Data feed.\17\ In 
addition, Market Makers would also receive the notification through the 
specialized quote feed (``SQF'') which is an interface that allows 
Specialists,\18\

[[Page 77136]]

Streaming Quote Traders \19\ and Remote Streaming Quote Traders \20\ to 
connect and send quotes into Phlx XL II.\21\
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    \16\ TOPO Plus Orders provides disseminated Exchange simple and 
complex PHLX order as well as top of file quotation information and 
PHLX last sale data. See Securities Exchange Act Release No. 60877 
(October 26, 2009), 74 FR 56255 (October 30, 2009) (SR-Phlx-2009-
92).
    \17\ PHLX Depth of Market is a data product that provides: (i) 
order and quotation information for individual quotes and orders on 
the PHLX book; (ii) last sale information for trades executed on 
PHLX; and (iii) an Imbalance Message. See Securities Exchange Act 
Release No. 66967 (May 11, 2012), 77 FR 29440 (May 17, 2012) (SR-
Phlx-2012-60). Both of these feeds require subscribers to pay 
certain fees in order to obtain these feeds. The pricing associated 
with these data feeds are located in the Exchange's Pricing Schedule 
at Section IX, titled ``Proprietary Date Feed Fees.''
    \18\ A Specialist is an Exchange member who is registered as an 
options specialist pursuant to Rule 1020(a).
    \19\ An SQT is defined in Exchange Rule 1014(b)(ii)(A) as an 
Registered Options Trader (``ROT'') who has received permission from 
the Exchange to generate and submit option quotations electronically 
in options to which such SQT is assigned.
    \20\ A Remote Streaming Quote Trader (``RSQT'') is defined 
Exchange Rule in 1014(b)(ii)(B) as an ROT that is a member or member 
organization with no physical trading floor presence who has 
received permission from the Exchange to generate and submit option 
quotations electronically in options to which such RSQT has been 
assigned. An RSQT may only submit such quotations electronically 
from off the floor of the Exchange.
    \21\ See Securities Exchange Act Release No. 63034 (October 4, 
2010), 75 FR 62441 (October 8, 2010) (SR-Phlx-2010-124).
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    The Exchange also proposes to rename Rule 1080(m) from ``Order 
Routing'' to ``Away Markets and Order Routing'' to better reflect the 
various order types in that section.
    The Exchange proposes this amendment become operative on January 2, 
2013.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \22\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \23\ 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, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system and, in general, to 
protect investors and the public interest.
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    \22\ 15 U.S.C. 78f(b).
    \23\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that exposing certain orders has the 
potential to result in more efficient executions for customers as 
responses to exposed orders could result in quicker executions. The 
Exchange's proposal to expose the orders to all Phlx XL II market 
participants as well as other market participants is consistent with 
the protection of investors and the public interest. Broadcasting the 
message to all market participants should promote broader awareness of, 
and provide increased opportunities for greater participation in, these 
executions and consequentially, facilitate the ability of the Exchange 
to bring together participants and encourage more robust competition 
for these orders. In addition, the proposal would continue to guarantee 
that orders will receive an execution that is at a price at least as 
good as the price disseminated by the best away market at the time the 
order was received.
    In addition, the Exchange believes that because all Phlx XL II 
participants and other market participants have the ability to 
subscribe to a data feed to provide them with the notifications 
exposing the orders, that all market participants may avail themselves 
of the same information. While Market Makers may receive the SQF data 
at no cost, Market Makers have burdensome quoting obligations \24\ 
which do not apply to other market participants. In addition, Market 
Makers incur other costs at the Exchange which are specific to their 
market making obligations, as compared to other market 
participants.\25\ The Exchange believes that because the notification 
message would be broadcast to all Phlx XL II and other market 
participants that subscribe to a data feed that it is a fair and 
equitable way to notify the marketplace of the opportunity to trade 
with these orders. Also, it is important to note that the exposure of 
the orders will not impact the manner in which the orders will be 
executed or routed today, rather the notification message is an 
addition to the current functionality that is in place today at the 
Exchange.
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    \24\ See Rule 1014 titled ``Obligations and Restrictions 
Applicable to Specialists and Registered Options Traders.''
    \25\ Market Makers incur costs related to assignments and costs 
related to subscribing to various data feeds. See Phlx's Pricing 
Schedule at Section VI, B and C.
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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 not necessary or appropriate in 
furtherance of the purposes of the Act, but rather this proposal should 
facilitate the ability of the Exchange to bring together participants 
and encourage more robust competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the
    Act\26\ and Rule 19b-4(f)(6) \27\ thereunder because the proposal 
does not: (i) Significantly affect the protection of investors or the 
public interest; (ii) impose any significant burden on competition; and 
(iii) by its terms, become operative for 30 days from the date on which 
it was filed, or such shorter time as the Commission may designate if 
consistent with the protection of investors and the public 
interest.\28\
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    \26\ 15 U.S.C. 78s(b)(3)(A).
    \27\ 17 CFR 240.19b-4(f)(6).
    \28\ In addition, Rule 19b-4(f)(6)(iii) requires the Exchange to 
give the Commission written notice of the Exchange's intent to file 
the proposed rule change, along with a brief description and text of 
the proposed rule change, at least five business days prior to the 
date of filing of the proposed rule change, or such shorter time as 
designated by the Commission. The Exchange has satisfied this 
requirement.
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    A proposed rule change filed under Rule 19b-4(f)(6) normally may 
not become operative prior to 30 days after the date of filing. 
However, Rule 19b-4(f)(6)(iii) \29\ permits the Commission to designate 
a shorter time if such action is consistent with the protection of 
investors and the public interest. The Exchange has requested that the 
Commission waive the 30-day operative delay period. The Commission 
believes that waiver of the 30-day operative delay period is consistent 
with the protection of investors and the public interest. Specifically, 
the Commission believes that the proposal would allow the Exchange to 
broadcast these orders to market participants who subscribe to the 
Exchange data feed, which may provide more opportunities for market 
participants to interact with such orders. For these reasons, the 
Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest, 
and designates the proposed rule change to be operative as of January 
2, 2013.\30\
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    \29\ 17 CFR 240.19b-4(f)(6)(iii).
    \30\ For purposes only of waiving the operative delay for this 
proposal, the Commission has considered the proposed rule's impact 
on efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.\31\
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    \31\ 15 U.S.C. 78s(b)(3)(C).
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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.

[[Page 77137]]

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-Phlx-2012-136 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-Phlx-2012-136. 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 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, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available 
for inspection and copying at the principal office of the Exchange. 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-Phlx-2012-136 and should be 
submitted on or before January 22, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\32\
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    \32\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-31246 Filed 12-28-12; 8:45 am]
BILLING CODE 8011-01-P