[Federal Register Volume 85, Number 39 (Thursday, February 27, 2020)]
[Notices]
[Pages 11421-11425]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-03921]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88263; File No. SR-CboeBZX-2020-006]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change Relating To Providing Members Certain 
Optional Risk Settings Under Proposed Interpretation and Policy .03 of 
Rule 11.13

February 21, 2020.
    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 February 12, 2020, Cboe BZX Exchange, Inc. (the ``Exchange'' or 
``BZX'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II, 
and III 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

    Cboe BZX Exchange, Inc. (the ``Exchange'' or ``BZX'') is filing 
with the Securities and Exchange Commission (the ``Commission'') a 
proposal to provide Members certain optional risk settings under 
proposed Interpretation and Policy .03 of Rule 11.13.
    The text of the proposed rule change is also available on the 
Exchange's website (http://markets.cboe.com/us/equities/regulation/rule_filings/bzx/), 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.

[[Page 11422]]

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 provide Members \3\ 
the option to utilize certain risk settings under proposed 
Interpretation and Policy .03 of Rule 11.13. In order to help Members 
manage their risk, the Exchange proposes to offer optional risk 
settings that would authorize the Exchange to take automated action if 
a designated limit for a Member is breached. Such risk settings would 
provide Members with enhanced abilities to manage their risk with 
respect to orders on the Exchange. Paragraph (a) of proposed 
Interpretation and Policy .03 of Rule 11.13 sets forth the specific 
risk controls the Exchange proposes to offer. Specifically, the 
Exchange proposes to offer two credit risk settings as follows:
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    \3\ See Exchange Rule 1.5(n).
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     The ``Gross Credit Risk Limit'', which refers to a pre-
established maximum daily dollar amount for purchases and sales across 
all symbols, where both purchases and sales are counted as positive 
values. For purposes of calculating the Gross Credit Risk Limit, only 
executed orders are included; and
     The ``Net Credit Risk Limit'', which refers to a pre-
established maximum daily dollar amount for purchases and sales across 
all symbols, where purchases are counted as positive values and sales 
are counted as negative values. For purposes of calculating the Net 
Credit Risk Limit, only executed orders are included.
    The Gross Credit and Net Credit risk settings are similar to credit 
controls measuring both gross and net exposure provided for in 
paragraph (h) of Interpretation and Policy .01 of Rule 11.13, but with 
certain notable differences. Importantly, the proposed risk settings 
would be applied at a Market Participant Identifier (``MPID'') level, 
while the controls noted in paragraph (h) of Interpretation and Policy 
.01 are applied at the logical port level.\4\ Therefore, the proposed 
risk management functionality would allow a Member to manage its risk 
more comprehensively, instead of relying on the more limited port level 
functionality offered today. Further, the proposed risk settings would 
be based on a notional execution value, while the controls noted in 
paragraph (h) of Interpretation and Policy .03 are applied based on a 
combination of outstanding orders on the Exchange's book and notional 
execution value. The Exchange notes that the current gross and net 
notional controls noted in paragraph (h) of Interpretation and Policy 
.03 will continue to be available in addition to the proposed risk 
settings.
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    \4\ A logical port represents a port established by the Exchange 
within the Exchange's System for trading and billing purposes. Each 
logical port established is specific to a Member or non-Member and 
grants that Member or non-Member the ability to accomplish a 
specific function, such as order entry, order cancellation, or data 
receipt.
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    Paragraph (c) of proposed Interpretation and Policy .03 of Rule 
11.13 provides that a Member that does not self-clear may allocate and 
revoke \5\ the responsibility of establishing and adjusting the risk 
settings identified in proposed paragraph (a) to a Clearing Member \6\ 
that clears transactions on behalf of the Member, if designated in a 
manner prescribed by the Exchange.
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    \5\ As discussed below, if a Member revokes the responsibility 
of establishing and adjusting the risk settings identified in 
proposed paragraph (a), the settings applied by the Member would be 
applicable.
    \6\ The term ``Clearing Member'' refers to a Member that is a 
member of a Qualified Clearing Agency and clears transactions on 
behalf of another Member. See Exchange Rule 11.15(a).
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    By way of background, Exchange Rule 11.15(a) requires that all 
transactions passing through the facilities of the Exchange shall be 
cleared and settled through a Qualified Clearing Agency using a 
continuous net settlement system.\7\ This requirement may be satisfied 
by direct participation, use of direct clearing services, or by entry 
into a corresponding clearing arrangement with another Member that 
clears through a Qualified Clearing Agency (i.e., a Clearing Member). 
If a Member clears transactions through another Member that is a 
Clearing Member, such Clearing Member shall affirm to the Exchange in 
writing, through letter of authorization, letter of guarantee or other 
agreement acceptable to the Exchange, its agreement to assume 
responsibility for clearing and settling any and all trades executed by 
the Member designating it as its clearing firm.\8\ Thus, while not all 
Members are Clearing Members, all Members are required to either clear 
their own transactions or to have in place a relationship with a 
Clearing Member that has agreed to clear transactions on their behalf 
in order to conduct business on the Exchange. Therefore, the Clearing 
Member that guarantees the Member's transactions on the Exchange has a 
financial interest in the risk settings utilized within the System \9\ 
by the Member.
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    \7\ The term ``Qualified Clearing Agency'' means a clearing 
agency registered with the Commission pursuant to Section 17A of the 
Act that is deemed qualified by the Exchange. See Exchange Rule 
1.5(u). The rules of any such clearing agency shall govern with the 
respect to the clearance and settlement of any transactions executed 
by the Member on the Exchange.
    \8\ A Member can designate one Clearing Member per Market 
Participant Identifier (``MPID'') associated with the Member.
    \9\ System is defined as ``the electronic communications and 
trading facility designated by the Board through which securities 
orders of Members are consolidated for ranking, execution and, when 
applicable, routing away.'' See Exchange Rule 1.5(aa).
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    Paragraph (c) is proposed by the Exchange in order to offer 
Clearing Members an opportunity to manage their risk of clearing on 
behalf of other Members, if authorized to do so by the Member trading 
on the Exchange. Specifically, the Exchange believes such functionality 
would help Clearing Members to better monitor and manage the potential 
risks that they assume when clearing for Members of the Exchange. A 
Member may allocate or revoke the responsibility of establishing and 
adjusting the risk settings identified in proposed paragraph (a) to its 
Clearing Member via the risk management tool available on the web 
portal at any time. By allocating such responsibility, a Member would 
thereby cede all control and ability to establish and adjust such risk 
settings to its Clearing Member unless and until such responsibility is 
revoked by the Member, as discussed in further detail below. Because 
the Member is responsible for its own trading activity, the Exchange 
will not provide a Clearing Member authorization to establish and 
adjust risk settings on behalf of a Member without first receiving 
consent from the Member. The Exchange would consider a Member to have 
provided such consent if it allocates the responsibility to establish 
and adjust risk settings to its Clearing Member via the risk management 
tool available on the web portal. By allocating such responsibilities 
to its Clearing Member, the Member consents to the Exchange taking 
action, as set forth in proposed paragraph (d) of Interpretation and 
Policy .03, with respect to the Member's trading activity. 
Specifically, if the risk setting(s) established by the Clearing Member 
are breached, the Member consents that the Exchange will automatically 
block new orders submitted and cancel open orders \10\ until such time 
that the applicable risk setting is adjusted to a higher limit by the 
Clearing Member. A Member may

[[Page 11423]]

also revoke responsibility allocated to its Clearing Member pursuant to 
this paragraph at any time via the risk management tool available on 
the web portal.
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    \10\ As discussed in further detail below, in the event of a 
risk setting breach certain orders entered for participation in an 
auction will not be canceled by the Exchange after the applicable 
cut-off period.
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    Paragraph (b) of proposed Interpretation and Policy .03 of Rule 
11.13 provides that either a Member or its Clearing Member, if 
allocated such responsibility pursuant to paragraph (c) of the proposed 
Interpretation and Policy, may establish and adjust limits for the risk 
settings provided in proposed paragraph (a) of Interpretation and 
Policy .03. A Member or Clearing Member may establish and adjust limits 
for the risk settings through the Exchange's risk management tool 
available on the web portal. The risk management web portal page will 
also provide a view of all applicable limits for each Member, which 
will be made available to the Member and its Clearing Member, as 
discussed in further detail below.
    Proposed paragraph (d) of Interpretation and Policy .03 of Rule 
11.13 would provide optional alerts to signal when a Member is 
approaching its designated limit. If enabled, the alerts would generate 
when the Member breaches certain percentage thresholds of its 
designated risk limit, as determined by the Exchange. Based on current 
industry standards, the Exchange anticipates initially setting these 
thresholds at fifty, seventy, or ninety percent of the designated risk 
limit. Both the Member and Clearing Member \11\ would have the option 
to enable the alerts via the risk management tool on the web portal and 
designate email recipients of the notification.\12\ The proposed alert 
system is meant to warn a Member and Clearing Member of the Member's 
trading activity, and will have no impact on the Member's order and 
trade activity if a warning percentage is breached. Proposed paragraph 
(e) of Interpretation and Policy .03 of Rule 11.13 would authorize the 
Exchange to automatically block new orders submitted and cancel all 
open orders in the event that a risk setting is breached.\13\ The 
Exchange will continue to block new orders submitted until the Member 
or Clearing Member, if allocated such responsibility pursuant to 
paragraph (c) of proposed Interpretation and Policy .03, adjusts the 
risk settings to a higher threshold. The proposed functionality is 
designed to assist Members and Clearing Members in the management of, 
and risk control over, their credit risk. Further, the proposed 
functionality would allow the Member to seamlessly avoid unintended 
executions that exceed their stated risk tolerance.
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    \11\ A Clearing Member would have the ability to enable alerts 
regardless of whether it was allocated responsibilities pursuant to 
proposed paragraph (c).
    \12\ The Member and Clearing Member may input any email address 
for which an alert will be sent via the risk management tool on the 
web portal.
    \13\ Orders entered for participation in the Opening or Closing 
Auction cannot be canceled or modified after the applicable ``cut-
off'' time, but will be marked for cancellation. See Exchange Rules 
11.23(b)(1)(B) and 11.23(c)(1)(B). Therefore, if a risk setting 
breach occurs after the applicable cut-off time for an Opening or 
Closing Auction, the auction orders will not be canceled by the 
Exchange. Similarly, orders entered for participation in the Cboe 
Market Close (``CMC'') will be matched for execution at the 
applicable cut-off time, and cannot be canceled or modified after 
the cut-off time. See Exchange Rule 11.28(a) and (b). Therefore, if 
a risk setting breach occurs after the CMC cut-off time, the CMC 
auction orders will not be canceled by the Exchange.
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    The Exchange does not guarantee that the proposed risk settings 
described in proposed Interpretation and Policy .03, are sufficiently 
comprehensive to meet all of a Member's risk management needs. Pursuant 
to Rule 15c3-5 under the Act,\14\ a broker-dealer with market access 
must perform appropriate due diligence to assure that controls are 
reasonably designed to be effective, and otherwise consistent with the 
rule.\15\ Use of the Exchange's risk settings included in proposed 
Interpretation and Policy .03 will not automatically constitute 
compliance with Exchange or federal rules and responsibility for 
compliance with all Exchange and SEC rules remains with the Member.
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    \14\ 17 CFR 240.15c3-5.
    \15\ See Division of Trading and Markets, Responses to 
Frequently Asked Questions Concerning Risk Management Controls for 
Brokers or Dealers with Market Access, available at https://www.sec.gov/divisions/marketreg/faq-15c-5-risk-management-controls-bd.htm.
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    Additionally, as the Exchange currently has the authority to share 
any of a Member's risk settings specified in Interpretation and Policy 
.01 of Rule 11.13 under Exchange Rule 11.15(f) with the Clearing Member 
that clears transactions on behalf of the Member, the Exchange also 
seeks such authority as it pertains to risk settings specified in 
proposed Interpretation and Policy .03. Existing Rule 11.15(f) provides 
the Exchange with authority to directly provide Clearing Members, that 
clear transactions on behalf of a Member, to share any of the Member's 
risk settings set forth under Interpretation and Policy .01 to Rule 
11.13.\16\ The purpose of such a provision under Rule 11.15(f) was 
implemented in order to reduce the administrative burden on 
participants on the Exchange, including both Clearing Members and 
Members, and to ensure that Clearing Members receive information that 
is up to date and conforms to the settings active in the System. 
Further, the provision was implemented because the Exchange believed 
such functionality would help Clearing Members to better monitor and 
manage the potential risks that they assume when clearing for Members 
of the Exchange. Now, the Exchange also proposes to amend paragraph (f) 
of Exchange Rule 11.15 to authorize the Exchange to share any of a 
Member's risk settings specified in proposed Interpretation and Policy 
.03 to Rule 11.13 with the Clearing Member that clears transactions on 
behalf of the Member. The Exchange notes that the use by a Member of 
the risk settings offered by the Exchange is optional. By using these 
proposed optional risk settings, a Member therefore also opts-in to the 
Exchange sharing its designated risk settings with its Clearing Member. 
The Exchange believes that its proposal to offer additional risk 
settings will allow Members to better manage their credit risk. 
Further, by allowing Members to allocate the responsibility for 
establishing and adjusting such risk settings to its Clearing Member, 
the Exchange believes Clearing Members may reduce potential risks that 
they assume when clearing for Members of the Exchange. The Exchange 
also believes that its proposal to share a Member's risk settings set 
forth under proposed Interpretation and Policy .03 to Rule 11.13 
directly with Clearing Members reduces the administrative burden on 
participants on the Exchange, including both Clearing Members and 
Members, and ensures that Clearing Members are receiving information 
that is up to date and conforms to the settings active in the System.
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    \16\ By using the optional risk settings provided in 
Interpretation and Policy .01, a Member opts-in to the Exchange 
sharing its risk settings with its Clearing Member. Any Member that 
does not wish to share such risk settings with its Clearing Member 
can avoid sharing such settings by becoming a Clearing Member. See 
Securities Exchange Act Release No. 80611 (May 5, 2017) 82 FR 22045 
(May 11, 2017) (SR-BatsBZX-2017-24).
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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

[[Page 11424]]

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.
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    \17\ 15 U.S.C. 78f(b).
    \18\ 15 U.S.C. 78f(b)(5).
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    Specifically, the Exchange believes the proposed amendment will 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system because it provides additional 
functionality for a Member to manage its credit risk. In addition, the 
proposed risk settings could provide Clearing Members, who have assumed 
certain risks of Members, greater control over risk tolerance and 
exposure on behalf of their correspondent Members, if allocated 
responsibility pursuant to proposed paragraph (c), while also providing 
an alert system that would help to ensure that both Members and its 
Clearing Member are aware of developing issues. As such, the Exchange 
believes that the proposed risk settings would provide a means to 
address potentially market-impacting events, helping to ensure the 
proper functioning of the market.
    In addition, the Exchange believes that the proposed rule change is 
designed to protect investors and the public interest because the 
proposed functionality is a form of risk mitigation that will aid 
Members and Clearing Members in minimizing their financial exposure and 
reduce the potential for disruptive, market-wide events. In turn, the 
introduction of such risk management functionality could enhance the 
integrity of trading on the securities markets and help to assure the 
stability of the financial system.
    Further, the Exchange believes that the proposed rule will foster 
cooperation and coordination with persons facilitating transactions in 
securities because the Exchange will provide alerts when a Member's 
trading activity reaches certain thresholds, which will be available to 
both the Member and Clearing Member. As such, the Exchange may help 
Clearing Members monitor the risk levels of correspondent Members and 
provide tools for Clearing Members, if allocated such responsibility, 
to take action.
    The proposal will permit Clearing Members who have a financial 
interest in the risk settings of Members to better monitor and manage 
the potential risks assumed by Clearing Members, thereby providing 
Clearing Members with greater control and flexibility over setting 
their own risk tolerance and exposure. To the extent a Clearing Member 
might reasonably require a Member to provide access to its risk 
settings as a prerequisite to continuing to clear trades on the 
Member's behalf, the Exchange's proposal to share those risk settings 
directly reduces the administrative burden on participants on the 
Exchange, including both Clearing Members and Members. Moreover, 
providing Clearing Members with the ability to see the risk settings 
established for Members for which they clear will foster efficiencies 
in the market and remove impediments to and perfect the mechanism of a 
free and open market and a national market system. The proposal also 
ensures that Clearing Members are receiving information that is up to 
date and conforms to the settings active in the System. The Exchange 
believes that the proposal is consistent with the Act, particularly 
Section 6(b)(5),\19\ because it will foster cooperation and 
coordination with persons engaged in facilitating transactions in 
securities and more generally, will protect investors and the public 
interest, by allowing Clearing Members to better monitor their risk 
exposure and by fostering efficiencies in the market and removing 
impediments to and perfect the mechanism of a free and open market and 
a national market system.
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    \19\ 15 U.S.C. 78f(b)(5).
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    Finally, the Exchange believes that the proposed rule change does 
not unfairly discriminate among the Exchange's Members because use of 
the risk settings are optional and are not a prerequisite for 
participation on the Exchange. The proposed risk settings are 
completely voluntary and, as they relate solely to optional risk 
management functionality, no Member is required or under any regulatory 
obligation to utilize them.

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 that is not necessary or appropriate 
in furtherance of the purposes of the Act. In fact, the Exchange 
believes that the proposal may have a positive effect on competition 
because it would allow the Exchange to offer risk management 
functionality that is comparable to functionality proposed to be 
offered by other national securities exchanges.\20\ Further, by 
providing Members and their Clearing Members additional means to 
monitor and control risk, the proposed rule may increase confidence in 
the proper functioning of the markets and contribute to additional 
competition among trading venues and broker-dealers. Rather than impede 
competition, the proposal is designed to facilitate more robust risk 
management by Members and Clearing Members, which, in turn, could 
enhance the integrity of trading on the securities markets and help to 
assure the stability of the financial system.
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    \20\ See Securities Exchange Act Release No. 87715 (December 11, 
2019) 84 FR 68995 (December 17, 2019) (SR-NYSE-2019-68).
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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.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    A. By order approve or disapprove such proposed rule change, or
    B. institute proceedings to determine whether the proposed rule 
change should be 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-CboeBZX-2020-006 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-CboeBZX-2020-006. 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

[[Page 11425]]

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-CboeBZX-2020-006 and should be submitted 
on or before March 19, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2020-03921 Filed 2-26-20; 8:45 am]
 BILLING CODE 8011-01-P