[Federal Register Volume 83, Number 57 (Friday, March 23, 2018)]
[Notices]
[Pages 12833-12836]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-05902]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82901; File Nos. SR-LCH SA-2017-012 and SR-LCH SA-2017-
013]


Self-Regulatory Organizations; LCH SA; Order Instituting 
Proceedings To Determine Whether To Approve or Disapprove Proposed Rule 
Changes Related to LCH SA's Recovery and Wind Down Plans

March 19, 2018.

I. Introduction

    On November 30, 2017, Banque Centrale de Compensation, which 
conducts business under the name LCH SA (``LCH SA''), 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 (LCH SA-2017-012) 
to adopt a recovery plan (the ``RP''). The proposed rule change was 
published for comment in the Federal Register on December 19, 2017.\3\ 
On December 7, 2017, LCH SA filed with the Commission a proposed rule 
change (LCH SA-2017-013) to adopt a wind down plan (``WDP'').\4\ The 
proposed rule change was published for comment in the Federal Register 
on December 19, 2017.\5\ On January 23, 2018, the Commission designated 
a longer period for Commission action on both proposed rule changes.\6\ 
To date, the Commission has not received any comments on the proposed 
rule changes. The Commission is publishing this order to institute 
proceedings pursuant to Section 19(b)(2)(B) \7\ of the Act to determine 
whether to approve or disapprove the proposed rule changes.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 34-82316 (Dec. 13, 
2017), 82 FR 60246 (Dec. 19, 2017) (SR-LCH-SA-2017-012) (``Notice 
012'').
    \4\ Capitalized terms used in this order but not defined herein 
have the same meanings specified in LCH SA's rules.
    \5\ Securities Exchange Act Release No. 34-82317 (Dec. 13, 
2017), 82 FR 60238 (Dec. 19, 2017) (SR-LCH SA-2017-013) (``Notice 
013'').
    \6\ Securities Exchange Act Release No. 34-82570 (Jan. 23, 
2018), 83 FR 4088 (Jan. 29, 2018) and Securities Exchange Act 
Release No. 34-82571 (Jan. 23, 2018), 83 FR 4081 (Jan. 29, 2018).
    \7\ 15 U.S.C. 78s(b)(2)(B).
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    Institution of proceedings does not indicate that the Commission 
has reached any conclusions with respect to the proposed rule changes, 
nor does it mean that the Commission will ultimately disapprove the 
proposed rule changes. Rather, as discussed below, the Commission seeks 
additional input on the proposed rule changes and issues presented by 
the proposed rule changes.

II. Description of the Proposed Rule Changes \8\
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    \8\ The descriptions of the proposed rule changes are 
substantially excerpted from Notice 012 and Notice 013.
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    As a ``covered clearing agency,'' \9\ LCH SA is required to, among 
other things, ``establish, implement, maintain and enforce written 
policies and procedures reasonably designed to . . . maintain a sound 
risk management framework for comprehensively managing legal, credit, 
liquidity, operational, general business, investment, custody, and 
other risks that arise in or are borne by the covered clearing agency, 
which . . . includes plans for the recovery and orderly wind-down of 
the covered clearing agency necessitated by credit losses, liquidity 
shortfalls, losses from general business risk, or any other losses.'' 
\10\ The Commission has previously clarified that it believes that such 
recovery and wind-down plans are ``rules'' within the meaning of 
Exchange Act section 19(b) and Rule 19b-4 because such plans would 
constitute changes to a stated policy, practice or interpretation of a 
covered clearing agency.\11\ Accordingly, a covered clearing agency, 
such as LCH SA, must file its RP and WDP with the Commission.
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    \9\ The term ``covered clearing agency'' is defined in SEC Rule 
17Ad-22(a)(5), 17 CFR 240.17Ad-22(a)(5).
    \10\ 17 CFR 240.17Ad-22(e)(3)(ii).
    \11\ Standards for Covered Clearing Agencies, Securities 
Exchange Act Release No. 34-78961 (Sep. 28, 2016), 81 FR 70786, 
70809 (Oct. 13, 2016).
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A. The RP (LCH SA-2017-012)

    The Commission has previously explained that the term ``recovery'' 
refers to action taken to allow a financial company that is non-viable 
as a going concern or insolvent to sustain its critical operations and 
services.\12\ To that end, LCH SA's RP seeks to maintain the continuity 
of critical services in times of extreme stress and to facilitate the 
recovery of LCH SA from such stress. In particular, the RP describes 
(i) the scenarios and triggers for initiating recovery measures; (ii) 
various recovery tools used in such recovery; and (iii) the governance 
framework for managing the

[[Page 12834]]

RP. Each of those aspects of the RP are discussed in more detail below.
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    \12\ Id. at 70808, n. 251.
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    The scenarios that could necessitate the implementation of the RP 
include the default of one or more clearing members, liquidity 
shortfalls as a result of the default of an investment counterparty of 
LCH SA or any other investment losses resulting from changes in the 
market value on the investments, a loss resulting from an event which 
impacts the critical services provided by LCH SA (e.g., failure in the 
provision of service by a third party), loss of critical contracts with 
exchanges, or the operational or financial failure of a financial 
market infrastructure such as an allied clearing house or trade 
repository.\13\
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    \13\ See Notice 012, 82 FR at 60247.
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    The default management process is used to re-establish a matched 
book and return to business as usual and therefore LCH SA considers it 
to be a recovery tool.\14\ When pre-funded resources, such as 
defaulter's margin, defaulter's default fund contributions, LCH SA's 
capital, and non-defaulters' default fund contributions, are no longer 
available to meet obligations due to member and non-member losses, the 
RP lists various measures or tools that LCH SA can use to return to 
business as usual.\15\ The RP is organized to discuss each tool by the 
nature of the loss (e.g., clearing member default losses, liquidity 
shortfalls, operational, business, and investment risks). The RP also 
discusses the sequence in which these tools would be used and the 
relative strength of each.\16\
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    \14\ Id.
    \15\ Id.
    \16\ Id. at 60249-60250.
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    When pre-funded resources have been exhausted after a clearing 
member default, LCH SA can call a default fund assessment up to a cap, 
request voluntary payments from all non-defaulting members, and 
effectuate service closure.\17\ In the event such tools are unavailable 
certain other business as usual tools, such as default fund additional 
margin, may enable LCH SA to collect additional resources.
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    \17\ Id. at 60249.
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    In the event of a liquidity shortfall, LCH SA may use its central 
bank credit line to deposit securities received on behalf of defaulting 
clearing members and obtain liquidity.\18\ Other potential tools to 
manage a liquidity stress situation are limits with respect to illiquid 
collateral, the application of increased haircuts on certain types of 
collateral to incentivize the use of more liquid collateral, or 
specific liquidity margins.\19\ LCH SA could also defer funding for the 
settlement platform for a limited period of time but views this as a 
tool of last resort.\20\
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    \18\ Id.
    \19\ Id.
    \20\ Id.
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    For most investment, business, and operational losses, LCH SA can 
allocate its capital surplus against losses.\21\ Further down the list 
of preferable recovery tools for non-clearing member defaults are the 
abilities to raise capital or utilize insurance meant to cover a 
specific operational risk event.\22\ For any disruption or loss of key 
third-party service provider, LCH SA would be able to exercise several 
contractual rights and maintains exit plans which are intended to 
safeguard the continuity of services.\23\
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    \21\ Id.
    \22\ See Notice 012, 82 FR at 60249.
    \23\ Id. at 60250.
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    The RP discusses the governance surrounding its creation, 
invocation, and operation.\24\ LCH SA relies upon its existing 
governance forums for both the creation and on-going monitoring and 
operation of the RP. Specifically, the LCH SA Management Committee is 
responsible for the preparation of the RP and the monitoring and 
implementation of the recovery tools set forth in the RP.\25\ The LCH 
SA Risk Committee reviews and makes a recommendation to the Board, who 
ultimately has the power to approve the RP.\26\ However, before 
submission to the LCH SA Risk Committee, the RP is reviewed and 
validated by the Executive Risk Committee of LCH Group.\27\
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    \24\ Id.
    \25\ Id.
    \26\ Id.
    \27\ Id.
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    The Default Management Group is responsible for the management of 
clearing member defaults while all critical decisions are escalated and 
submitted to the LCH SA Default Crisis Management Team (``DCMT'').\28\ 
The triggering of recovery measures is subject to discussion in the 
DCMT and approval by the LCH SA CEO.\29\
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    \28\ Id.
    \29\ Id.
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    The management of non-clearing member events will vary based on the 
nature of the event.\30\ For example, investment losses and liquidity 
shortfalls are managed by the departments responsible for controlling 
such risks within the parameters set by the Board.\31\ Similarly, 
operational risks are managed by each business line in accordance with 
the operational risk policy approved by the Board.\32\ Business risk is 
managed by individual business lines, with a second line challenge 
performed by the risk and finance departments to verify if sufficient 
capital buffers are available for the applicable business risks.\33\ 
Matters are escalated to the Management Committee when the RP is 
triggered and the LCH SA Board will approve implementation of the 
RP.\34\
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    \30\ Id.
    \31\ Id.
    \32\ Id.
    \33\ Id.
    \34\ Id.
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B. The WDP (LCH SA-2017-013)

    In the event a recovery is not successful, LCH SA would invoke its 
WDP to wind down its operations to full service closure in an orderly 
manner, thereby minimizing the disruption to clearing members, market 
participants, and the broader financial system. The WDP would be 
triggered after a determination by the LCH SA Board that all the 
recovery tools have been exhausted and have failed to return LCH SA to 
business as usual.\35\ A voluntary wind-down not precipitated by these 
extreme events would not be considered.\36\ The WDP would set forth 
clear mechanisms for the transfer of LCH SA's membership and business, 
and would be designed to facilitate continued access to critical 
services and to minimize market impact.\37\
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    \35\ Notice 013, 82 FR at 60239.
    \36\ Id.
    \37\ Id. at 60239-60240.
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    The decision to wind down would be taken by the Board and 
ultimately the shareholders' meeting, upon advice of the Executive Risk 
Committee and Local Management Committee (``LMC'').\38\ The 
implementation of the WDP would be monitored by the LCH SA LMC or 
Default Crisis Management Team, the executive committee in charge of 
the coordination of defaults.\39\ All relevant regulatory authorities 
would be consulted before such a decision is taken, and the French 
Autorit[eacute] de Contr[ocirc]le Prudentiel et de Resolution would 
have to approve such a decision, unless all clearing services have 
already been closed.\40\ These authorities would then be kept regularly 
informed of the plan's implementation.\41\ Any decision to wind-down 
while in resolution would be taken by the relevant governing resolution 
authority.\42\
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    \38\ Id. at 60239.
    \39\ Id.
    \40\ Id.
    \41\ Id.
    \42\ Id.
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    The WDP assumes that LCH SA's businesses would be wound down until 
full closure and that the closure of

[[Page 12835]]

various business lines could occur at different times, with some 
business functions significantly scaled down or even closed by the time 
the decision to wind-down is officially made.\43\ The WDP also states 
that LCH SA would publish written notice to the clearing members that a 
wind-down event has occurred and potential dates by which transactions 
will no longer be accepted for clearing.\44\ In a non-default situation 
or in a situation where the corresponding business line is still 
active, LCH SA would attempt to give clearing members the maximum time 
necessary to clear transactions in the normal course, close-out 
positions, and switch to another central counterparty.\45\
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    \43\ Id.
    \44\ Id. at 60239-60240.
    \45\ Id. at 60240.
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    The WDP also provides detail about the closure of supporting 
functions. For instance, the treasury function would close once all 
clearing services have ceased and monies are paid by LCH SA and its 
members.\46\ Any other supporting operational, information technology, 
or risk functions would be kept active until all positions are 
closed.\47\ Further, once the WDP is implemented, LCH SA would deposit 
remaining cash in central bank accounts or invest the cash in 
instruments with maturities no longer than same-day repos.\48\ The WDP 
further notes that LCH SA's contractual agreements with third-party 
service providers, such as information technology or venue providers, 
contain wind-down provisions that permit LCH SA to exit the agreements 
under particular conditions.\49\ Finally, the WDP provides citations to 
its various clearing services' rule book provisions giving a legal 
basis for the actions taken to effectuate the plan.\50\
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    \46\ Id.
    \47\ Id.
    \48\ Id.
    \49\ Id.
    \50\ Id.
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III. Proceedings To Determine Whether To Approve or Disapprove the 
Proposed Rule Changes and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act to determine whether the proposed rule changes 
should be approved or disapproved.\51\ Institution of proceedings is 
appropriate at this time in view of the legal and policy issues raised 
by the proposed rule changes. As noted above, institution of 
proceedings does not indicate that the Commission has reached any 
conclusions with respect to any of the issues involved. Rather, the 
Commission seeks and encourages interested persons to comment on the 
proposed rule changes and provide arguments to support the Commission's 
analysis as to whether to approve or disapprove the proposals.
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    \51\ 15 U.S.C. 78s(b)(2)(B) (providing that proceedings to 
determine whether to disapprove a proposed rule change must be 
concluded within 180 days of the date of publication of notice of 
the filing of the proposed rule change. The time for conclusion of 
the proceedings may be extended for up to an additional 60 days if 
the Commission finds good cause for such extension and publishes its 
reasons for so finding or if the self-regulatory organization 
consents to the extension).
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    Pursuant to Section 19(b)(2)(B) of the Act,\52\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of, and input from, commenters with respect to the proposed 
rule changes' consistency with the Act \53\ and the rules thereunder, 
including the following provisions:
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    \52\ 15 U.S.C. 78s(b)(2)(B).
    \53\ 15 U.S.C. 78q-1.
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     Section 17A(b)(3)(F) of the Act, which requires that the 
rules of a clearing agency be designed to, among other things, assure 
the safeguarding of securities and funds which are in the custody or 
control of the clearing agency for which it is responsible; \54\
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    \54\ 15 U.S.C. 78q-1(b)(3)(F).
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     Rule 17Ad-22(e)(2) under the Act, which requires that a 
covered clearing agency establish, implement, maintain, and enforce 
written policies and procedures reasonably designed to provide for 
governance arrangements that are clear and transparent and support the 
public interest requirements in Section 17A of the Act applicable to 
clearing agencies, and the objectives of owners and participants; \55\
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    \55\ 17 CFR 240.17Ad-22(e)(2).
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     Rule 17Ad-22(e)(3)(ii) under the Act, which requires that 
covered clearing agencies, among other things, ``establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to . . . maintain a sound risk management framework for 
comprehensively managing legal, credit, liquidity, operational, general 
business, investment, custody, and other risks that arise in or are 
borne by the covered clearing agency, which . . . includes plans for 
the recovery and orderly wind-down of the covered clearing agency 
necessitated by credit losses, liquidity shortfalls, losses from 
general business risk, or any other losses;'' and
     Rules 17Ad-22(e)(15)(i)-(ii),\56\ which require LCH SA to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to determine the amount of liquid net 
assets funded by equity based upon its general business risk profile 
and the length of time required to achieve a recovery or orderly wind-
down, as appropriate, of its critical operations and services if such 
action is taken and to establish, implement, maintain and enforce 
written policies and procedures reasonably designed to provide for 
holding liquid net assets funded by equity equal to the greater of 
either six months of its current operating expenses or the amount 
determined by the board of directors to be sufficient to ensure a 
recovery or orderly wind-down of critical operations and services of 
the covered clearing agency, as contemplated by the plans established 
under Rule 17Ad-22(e)(3)(ii).\57\
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    \56\ 17 CFR 240.17Ad-22(e)(15)(i)-(ii).
    \57\ 17 CFR 240.17Ad-22(e)(3)(ii).
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IV. Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues raised by the proposed rule changes. In particular, the 
Commission invites the written views of interested persons concerning 
whether the proposed rule changes are inconsistent with Section 
17A(b)(3)(F) of the Act \58\ and Rules 17Ad-22(e)(2),\59\ 17Ad-
22(e)(3)(ii),\60\ and 17Ad-22(e)(15)(i)-(ii),\61\ under the Act, or any 
other provision of the Act or rules and regulations thereunder.
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    \58\ 15 U.S.C. 78q-1(b)(3)(F).
    \59\ 17 CFR 240.17Ad-22(e)(2).
    \60\ 17 CFR 240.17Ad-22(e)(3)(ii).
    \61\ 17 CFR 240.17Ad-22(e)(15)(i)-(ii).
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    Although there do not appear to be any issues relevant to approval 
or disapproval that would be facilitated by an oral presentation of 
views, data, and arguments, the Commission will consider, pursuant to 
Rule 19b-4, any request for an opportunity to make an oral 
presentation.\62\
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    \62\ Section 19(b)(2) of the Act, as amended by the Securities 
Acts Amendments of 1975, Public Law 94-29, 89 Stat. 97 (1975), 
grants the Commission flexibility to determine what type of 
proceeding--either oral or notice and opportunity for written 
comments--is appropriate for consideration of a particular proposal 
by a self-regulatory organization. See Securities Acts Amendments of 
1975, Report of the Senate Committee on Banking, Housing and Urban 
Affairs to Accompany S. 249, S. Rep. No. 75, 94th Cong., 1st Sess. 
30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposed rule changes should be 
approved or disapproved on or before April 13, 2018. Any person who 
wishes to file a rebuttal to any other person's

[[Page 12836]]

submission must file that rebuttal on or before April 27, 2018. 
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-LCH SA-2017-012 and SR-LCH SA-2017-013 on the subject 
line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549.

All submissions should refer to SR-LCH SA-2017-012 and SR-LCH SA-2017-
013. These file numbers 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 submissions, all subsequent amendments, 
all written statements with respect to the proposed rule changes that 
are filed with the Commission, and all written communications relating 
to the proposed rule changes 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 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 filings also will be 
available for inspection and copying at the principal office of LCH SA 
and on LCH SA's website at http://www.lch.com/asset-classes/cdsclear. 
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-LCH SA-2017-012 and 
SR-LCH SA-2017-013 and should be submitted on or before April 13, 2018. 
If comments are received, any rebuttal comments should be submitted on 
or before April 27, 2018.
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    \63\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\63\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-05902 Filed 3-22-18; 8:45 am]
 BILLING CODE 8011-01-P