[Federal Register Volume 84, Number 206 (Thursday, October 24, 2019)]
[Notices]
[Pages 57096-57099]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-23169]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87348; File No. SR-C2-2019-021]


Self-Regulatory Organizations; Cboe C2 Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Make 
Permanent Certain Options Market Rules That Are Linked to the Equity 
Market Plan To Address Extraordinary Market Volatility

October 18, 2019.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on October 16, 2019, Cboe C2 Exchange, Inc. (the ``Exchange'' or 
``C2'') 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 Exchange 
filed the proposal as a ``non-controversial'' proposed rule change 
pursuant to Section 19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-
4(f)(6) thereunder.\4\ 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.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe C2 Exchange, Inc. (``C2'' or the ``Exchange'') is filing with 
the Securities and Exchange Commission (the ``Commission'') to make 
permanent certain options market rules that are linked to the equity 
market Plan to Address Extraordinary Market Volatility. The text of the 
proposed rule change is provided in Exhibit 5.
    The text of the proposed rule change is also available on the 
Exchange's website (http://markets.cboe.com/us/options/regulation/rule_filings/ctwo/), at the Exchange's Office of the Secretary, 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 make permanent 
certain options market rules in connection with the equity market Plan 
to Address Extraordinary Market Volatility (the ``Limit Up-Limit Down 
Plan'' or the ``Plan''). This change is being proposed in connection 
with the recently approved amendment to the Limit Up-Limit Down Plan 
that allows the Plan to continue to operate on a permanent basis 
(``Amendment 18'').\5\
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    \5\ See Securities Exchange Act Release No. 85623 (April 11, 
2019), 84 FR 16086 (April 17, 2019) (Order Approving Amendment No. 
18).
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    In an attempt to address extraordinary market volatility in NMS 
Stocks, and, in particular, events like the severe volatility on May 6, 
2010, U.S. national securities exchanges and the Financial Industry 
Regulatory Authority, Inc. (collectively, ``Participants'') drafted the 
Plan pursuant to Rule 608 of Regulation

[[Page 57097]]

NMS under the Act.\6\ On May 31, 2012, the Commission approved the 
Plan, as amended, on a one-year pilot basis.\7\ Though the Plan was 
primarily designed for equity markets, the Exchange believed it would, 
indirectly, potentially impact the options markets as well. Thus, the 
Exchange has previously adopted and amended Rules 6.39 and 
Interpretation and Policy .01 to Rule 6.29 to ensure the option markets 
were not harmed as a result of the Plan's implementation and 
implemented such rules on a pilot basis that has coincided with the 
pilot period for the Plan (collectively, the ``Options Pilots'').\8\ 
Rule 6.39 essentially serves as a roadmap for the Exchange's universal 
changes due to the implementation of the Plan and Rule 6.29.01 provides 
that transactions executed during a limit or straddle state are not 
subject to the obvious and catastrophic error rules. A limit or 
straddle state occurs when at least one side of the National Best Bid 
(``NBB'') or Offer (``NBO'') bid/ask is priced at a non-tradable level. 
Specifically, a straddle state exists when the NBB is below the lower 
price band while the NBO is inside the prices band or when the NBO is 
above the upper price band and the NBB is within the band, while a 
limit state occurs when the NBO equals the lower price band (without 
crossing the NBB), or the NBB equals the upper price band (without 
crossing the NBO). The Exchange adopted the Options Pilots to protect 
investors because when an underlying security is in a limit or straddle 
state, there will not be a reliable price for the security to serve as 
a benchmark for the price of the option. Specifically, the Exchange 
adopted Rule 6.29.01 because the application of the obvious and 
catastrophic error rules would be impracticable given the potential for 
lack of a reliable NBBO in the options market during limit and straddle 
states. When adjusting or busting a trade pursuant to the obvious error 
rule, the determination of theoretical value of a trade generally 
references the NBB (for erroneous sell transactions) or NBO (for 
erroneous buy transactions) just prior to the trade in question, and is 
therefore not reliable when at least one side of the NBBO is priced at 
a non-tradeable level, as is the case in limit and straddle states. In 
such a situation, determining theoretical value may often times be a 
very subjective rather than an objective determination and could give 
rise to additional uncertainty and confusion for investors. As a 
result, application of the obvious and catastrophic error rules would 
be impracticable given the lack of a reliable NBBO in the options 
market during limit and straddle states, and may produce undesirable 
effects or unanticipated consequences. The Exchange adopted additional 
measures via other Options Pilot rules that are designed to protect 
investors during limit and straddle states. For example, the Exchange 
will reject market orders and not elect stop orders \9\ during a Limit 
Up-Limit Down state to ensure that only those orders with a limit price 
will be executed during a limit or straddle state given the uncertainty 
of market prices during such a state. Furthermore, the Exchange 
believes that eliminating the application of obvious error rules during 
a limit or straddle state eliminates the re-evaluation of a transaction 
executed during such a state that could potentially create an 
unreasonable adverse selection opportunity due to lack of a reliable 
reference price on one side of the market or another and discourage 
participants from providing liquidity during limit and straddle states, 
which is contrary to the goal in limiting participants' adverse 
selection with the application of the obvious error rule during normal 
trading states. For these reasons, the Exchange believes the Options 
Pilots are designed to add certainty on the options markets, which 
encourages more investors to participate in light of the changes 
associated with the Plan. The Plan was originally implemented on a 
pilot-basis in order to allow the public, the participating exchanges, 
and the Commission to assess the operation of the Plan and whether the 
Plan should be modified prior to approval on a permanent basis. As 
stated, the Exchange adopted the Option Pilots to coincide with this 
pilot; to continue the protections therein while the industry gains 
further experience operating the Plan.
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    \6\ See Securities Exchange Act Release No. 64547 (May 25, 
2011), 76 FR 31647 (June 1, 2011) (File No. 4-631).
    \7\ See Securities and Exchange Act Release No. 67091 (May 31, 
2012) 77 FR 33498 (June 6, 2012).
    \8\ See Securities Exchange Act Release Nos. 69345 (April 8, 
2013), 78 FR 21985 (April 12, 2013) (SR-C2-2013-013) (amending 
certain options rules to coincide with the pilot period for the 
Plan, including Rule 6.39 and Interpretation and Policy .08 to Rule 
6.15, which was later renumbered to Interpretation and Policy .01 to 
Rule 6.29); and 85624 (April 11, 2019), 84 FR 16130 (April 17, 2019) 
(SR-C2-2019-008) (proposal to extend the pilot for certain options 
pilots).
    \9\ This includes rules in connection with special handling for 
market orders, market-on-close orders, and stop orders, as well as 
for certain electronic order handling features in a Limit Up-Limit 
Down state, the obvious error rules, and providing that the Exchange 
will not require Market-Makers to quote in series of options when 
the underlying security is in a Limit Up-Limit Down state.
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    In connection with the order approving the establishment of the 
obvious error pilot, as well as the extensions of the obvious error 
pilot, the Exchange committed to submit monthly data regarding the 
program and to submit an overall analysis of the obvious error pilot in 
conjunction with the data submitted under the Plan and any other data 
as requested by the Commission. Pursuant to a rule filing, approved on 
April 3, 2014, each month, the Exchange committed to provide the 
Commission, and the public, a dataset containing the data for each 
straddle and limit state in optionable stocks that had at least one 
trade on the Exchange.\10\ The Exchange has continued to provide the 
Commission with this data on a monthly basis from October 2015. For 
each trade on the Exchange, the Exchange provides (a) the stock symbol, 
option symbol, time at the start of the straddle or limit state, an 
indicator for whether it is a straddle or limit state, and (b) for the 
trades on the Exchange, the executed volume, time-weighted quoted bid-
ask spread, time-weighted average quoted depth at the bid, time-
weighted average quoted depth at the offer, high execution price, low 
execution price, number of trades for which a request for review for 
error was received during straddle and limit states, an indicator 
variable for whether those options outlined above have a price change 
exceeding 30% during the underlying stock's limit or straddle state 
compared to the last available option price as reported by OPRA before 
the start of the limit or straddle state. In addition, to help evaluate 
the impact of the pilot program, the Exchange has provided to the 
Commission, and the public, assessments relating to the impact of the 
operation of the obvious error rules during limit and straddle states 
including: (1) An evaluation of the statistical and economic impact of 
limit and straddle states on liquidity and market quality in the 
options markets, and (2) an assessment of whether the lack of obvious 
error rules in effect during the straddle and limit states are 
problematic. The Exchange has concluded that the obvious error pilot 
does not negatively impact market quality during normal market 
conditions,\11\ and that there has been

[[Page 57098]]

insufficient data to assess whether a lack of obvious error rules is 
problematic, however, the Exchange believes the continuation of Rule 
6.29.01 functions to protect against any unanticipated consequences in 
the options markets during a limit or straddle state and add certainty 
on the options markets.
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    \10\ See Securities Exchange Act Release No. 71856 (April 3, 
2014), 79 FR 19676 (April 9, 2014) (SR-C2-2014-008); see also Cboe 
Global Markets, LULD Limit and Straddle Reports, available at http://markets.cboe.com/us/options/market_statistics/luld_reports/?mkt=opt.
    \11\ See also Cboe Global Markets, LULD Limit and Straddle 
Reports, available at http://markets.cboe.com/us/options/market_statistics/luld_reports/?mkt=opt. During the most recent 
Review Period the Exchange did not receive any obvious error review 
requests for Limit-Up-Limit Down trades, and Limit Up-Limit Down 
trade volume accounted for nominal overall trade volume.
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    The Commission recently approved the Plan on a permanent basis 
(Amendment 18).\12\ In connection with this approval, the Exchange now 
proposes to amend Exchange Rules 6.39 and Interpretation and Policy .01 
to Rule 6.29 that currently implement the provisions of the Plan on a 
pilot basis to eliminate the pilot basis, which effectiveness expires 
on October 18, 2019, and to make such rules permanent. In its approval 
order to make the Plan permanent, the Commission recognized that, as a 
result of the Participants' and industry analysis of the Plan's 
operation, the Limit Up-Limit Down mechanism effectively addresses 
extraordinary market volatility. Indeed, the Plan benefits markets and 
market participants by helping to ensure orderly markets, but also, the 
Exchange believes, based on the data made available to the public and 
the Commission during the pilot period, that the obvious error pilot 
does not negatively impact market quality during normal market 
conditions.\13\ Rather, the Exchange believes the obvious error pilot 
functions to protect against any unanticipated consequences in the 
options markets during a limit or straddle state and add certainty on 
the options markets. The Exchange also believes the other Options 
Pilots rules provide additional measures designed to protect investors 
during limit and straddle states. For example, the Exchange will reject 
market orders and not elect stop orders \14\ during a Limit Up-Limit 
Down state to ensure that only those orders with a limit price will be 
executed during a limit or straddle state given the uncertainty of 
market prices during such a state. This removes impediments to and 
perfects the mechanism of a free and open market and national market 
system by encouraging more investors to participate in light of the 
changes associated with the Plan. The Exchange believes that if 
approved on a permanent basis, the Options Pilots would permanently 
provide investors with the above-described additional certainty of 
market prices and mitigation of unanticipated consequences and 
unreasonable adverse selection risk during limit and straddle states.
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    \12\ See supra note 5.
    \13\ See supra note 11.
    \14\ See supra note 9.
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    The Exchange notes that the Commission recently approved to make 
permanent substantively identical options pilots within the rules of 
the Exchange's affiliated exchange, Cboe Options Exchange, Inc. (``Cboe 
Options) \15\, and understands that the other national securities 
exchanges will also file similar proposals to make permanent their 
respective pilot programs. Since the Commission's approval of Amendment 
18 allowing the Plan to operate on a permanent basis, the Exchange and 
other national securities exchanges have determined that no further 
amendments should be made to the Options Pilots; \16\ the current 
Options Pilots effectively address extraordinary market volatility, are 
reasonably designed to comply with the requirements of the Plan, 
facilitate compliance with the Plan and should now operate on a 
permanent basis, consistent with the Plan. The Exchange does not 
propose any substantive or additional changes to Exchange Rules 6.39 or 
Interpretation and Policy .01 to Rule 6.29.
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    \15\ See Securities and Exchange Act Release No. 87311 (October 
15, 2019) (Notice of Filing of Amendment No. 2 and Order Granting 
Accelerated Approval of a Proposed Rule Change, as Modified by 
Amendment Nos. 1 and 2, to Make Permanent Certain Options Market 
Rules That Are Linked to the Equity Market Plan to Address 
Extraordinary Market Volatility) (SR-CBOE-2019-049).
    \16\ See Securities Exchange Act Release No. 85616 (April 11, 
2019), 84 FR 16093 (April 17, 2019) (SR-CBOE-2019-020) (proposal to 
extend the pilot for certain options market rules linked to the 
Plan).
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of Section 6(b) of the Act.\17\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \18\ requirements that the rules of an exchange be 
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 regulating, clearing, 
settling, processing information with respect to, and 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. Additionally, 
the Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \19\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \17\ 15 U.S.C. 78f(b).
    \18\ 15 U.S.C. 78f(b)(5).
    \19\ Id.
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    In particular, the Exchange believes that the proposed rule 
supports the objectives of perfecting the mechanism of a free and open 
market and the national market system because it promotes transparency 
and uniformity across markets concerning rules for options markets 
adopted to coincide with the Plan. As stated, the Commission recently 
approved to make permanent substantively identical options pilots 
within the rules of the Exchange's affiliated exchange, Cboe Options, 
and the Exchange now proposes the same. The Exchange believes that 
eliminating the pilot basis for the Options Pilots and making such 
rules permanent facilitates compliance with the Plan by adding 
certainty to the markets during periods of market volatility, which has 
been approved and found by the Commission to be reasonably designed to 
prevent potentially harmful price volatility in NMS Stocks. It has been 
determined by the Commission that the Plan benefits markets and market 
participants by helping to ensure orderly markets, and, based on the 
data made available to the public and the Commission during the pilot 
period for Rule 6.29.01, the Plan does not negatively impact options 
market quality during normal market conditions. Rather, the Plan, as it 
is implemented under the obvious error pilot, functions to protect 
against any unanticipated consequences in the options markets during a 
limit or straddle state and add certainty on the options markets. 
During a limit or straddle state, determining theoretical value of an 
option may be a subjective rather than an objective determination given 
the lack of a reliable NBBO, which may create an unreasonable adverse 
selection opportunity and discourage participants from providing 
liquidity during limit and straddle states. Therefore, the Exchange 
believes eliminating obvious error review in such states would, in 
turn, eliminate uncertainty and confusion for investors and benefit 
investors by encouraging more participation in light of the changes 
associated with the Plan. As

[[Page 57099]]

stated, the Exchange believes the other Options Pilots rules provide 
additional measures designed to protect investors during limit and 
straddle states. For example, the Exchange will reject market orders 
and not elect stop orders \20\ during a Limit Up-Limit Down state to 
ensure that only those orders with a limit price will be executed 
during a limit or straddle state given the uncertainty of market prices 
during such a state. Accordingly, the Exchange believes that making the 
Options Pilots permanent will further the goals of investor protection 
and fair and orderly markets as the rules effectively address 
extraordinary market volatility pursuant to the Plan.
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    \20\ See supra note 9.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change would 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The proposed rule change is 
necessary to reflect that the Plan no longer operates as a pilot and 
has been approved to operate on a permanent basis by the Commission. As 
such, Exchange Rules 6.39 or Interpretation and Policy .01 to Rule 
6.29, which implement protections in connection with the Plan, should 
be amended to operate on a permanent basis. The Exchange understands 
that the other national securities exchanges will also file similar 
proposals to make permanent their respective pilot programs, and, as 
stated above, notes that the Commission recently approved to make 
permanent substantively the same options pilot rules on Cboe Options. 
Thus, the proposed rule change will help to ensure consistency across 
market centers without implicating any competitive issues.

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

    The Exchange neither solicited nor received comments on the 
proposed rule change.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \21\ and Rule 19b-
4(f)(6) thereunder.\22\
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    \21\ 15 U.S.C. 78s(b)(3)(A).
    \22\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to give the Commission 
written notice of its 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) \23\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, Rule 19b-4(f)(6)(iii) \24\ 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 asked 
the Commission to waive the 30-day operative delay so that the proposed 
rule change may become effective and operative immediately upon filing. 
The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest, as 
it will allow the current Options Pilots to continue on a permanent 
basis without any changes, prior to the pilot expiration on October 18, 
2019. For this reason, the Commission hereby waives the 30-day 
operative delay and designates the proposed rule change as operative 
upon filing.\25\
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    \23\ 17 CFR 240.19b-4(f)(6).
    \24\ 17 CFR 240.19b-4(f)(6)(iii).
    \25\ For purposes only of waiving the 30-day operative delay, 
the Commission has also 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. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule change should be approved or 
disapproved.

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. 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-C2-2019-021 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-C2-2019-021. 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 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-C2-2019-021 and should be submitted on 
or before November 14, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
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    \26\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-23169 Filed 10-23-19; 8:45 am]
 BILLING CODE 8011-01-P