[Federal Register Volume 85, Number 118 (Thursday, June 18, 2020)]
[Notices]
[Pages 36907-36910]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-13122]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89062; File No. SR-CBOE-2020-050]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change To Amend Rules 5.37 and 5.73

June 12, 2020.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 3, 2020, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe 
Options'') filed with the Securities and Exchange Commission 
(``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 Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes 
to amend Rules 5.37 and 5.73. The text of the proposed rule change is 
provided below.
(additions are italicized; deletions are [bracketed])
* * * * *

Rules of Cboe Exchange, Inc.

* * * * *
Rule 5.37. Automated Improvement Mechanism (``AIM'' or ``AIM Auction'')
    A Trading Permit Holder (the ``Initiating TPH'') may electronically 
submit for execution an order it represents as agent (``Agency Order'') 
against principal interest or a solicited order(s) [(except for an 
order for the account of any Market-Maker with an appointment in the 
applicable class on the Exchange)] (an ``Initiating Order'') provided 
it submits the Agency Order for electronic execution into an AIM 
Auction pursuant to this Rule. For purposes of this Rule, the term 
``NBBO'' means the national best bid or national best offer at the 
particular point in time applicable to the reference, and the term 
``Initial NBBO'' means the national best bid or national best offer at 
the time an Auction is initiated. Bulk messages are not eligible for 
AIM.
* * * * *
    (c) AIM Auction Process. Upon receipt of an Agency Order that meets 
the conditions in paragraphs (a) and (b), the AIM Auction process 
commences.
    (1)-(4) No change.
    (5) AIM Auction Responses. [All Users] Any User other than the 
Initiating TPH (the System rejects a response with the same EFID as the 
Initiating Order) may submit responses to an AIM Auction that are 
properly marked specifying price, size, side of the market, and the 
Auction ID for the AIM Auction to which the User is submitting the 
response. An AIM response may only participate in the AIM Auction with 
the Auction ID specified in the response.
* * * * *
Rule 5.73. FLEX Automated Improvement Mechanism (``FLEX AIM'' or ``FLEX 
AIM Auction'')
    A FLEX Trader (the ``Initiating FLEX Trader'') may electronically 
submit for execution an order (which may be a simple or complex order) 
it represents as agent (``Agency Order'') against principal interest or 
a solicited order(s) [(except, if the Agency Order is a simple order, 
for an order for the account of any FLEX Market-Maker with an 
appointment in the applicable FLEX Option class on the Exchange)] (an 
``Initiating Order'') provided it submits the Agency Order for 
electronic execution into a FLEX AIM Auction pursuant to this Rule.
* * * * *
    (c) FLEX AIM Auction Process. Upon receipt of an Agency Order that 
meets the conditions in paragraphs (a) and (b), the FLEX AIM Auction 
process commences.
    (1)-(4) No change.
    (5) FLEX AIM Responses. Any FLEX Trader other than the Initiating 
FLEX Trader (the System rejects a response with the same EFID as the 
Initiating Order) may submit responses to a FLEX AIM Auction that are 
properly marked specifying price, size, side, and the Auction ID for 
the FLEX AIM Auction to which the FLEX Trader is submitting the 
response. A FLEX AIM response may only participate in the FLEX AIM 
Auction with the Auction ID specified in the response.
* * * * *
    The text of the proposed rule change is also available on the 
Exchange's website (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), 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 Exchange proposes to permit orders for the accounts of Market-
Makers with an appointment in the applicable class to be solicited for 
the Initiating Order \3\ submitted for execution against an Agency 
Order in a proprietary index option class into a simple AIM Auction 
pursuant to Rule 5.37 or a simple FLEX AIM Auction pursuant to Rule 
5.73. Currently, the introductory paragraphs of Rules 5.37 and 5.73 
prohibit orders for the accounts of Market-Makers with an appointment 
in the applicable class to be solicited to execute against the Agency 
Order in a simple AIM or FLEX AIM Auction, respectively.\4\ This 
provision was initially included in Rules regarding these auctions 
because the Exchange initially only permitted appointed Market-Makers 
(and TPHs representing customers at the top of the Book) to submit 
responses to AIM and FLEX Auctions. However, the Exchange now permits 
any user to submit responses to simple AIM and FLEX AIM Auctions.\5\ 
Therefore, while market participants other than appointed Market-Makers 
may contribute liquidity to these crossing auctions as either contra 
orders or responses, appointed Market-Makers, who are the primary 
source of liquidity on the Exchange in

[[Page 36908]]

their appointed classes, are limited in the manner in which they may 
provide liquidity to these auctions. Given that contra orders that 
comprise Initiating Orders may be allocated a percentage of the Agency 
Order at the conclusion of the auctions, the limited ability of 
appointed Market-Makers to participate in simple AIM and FLEX AIM 
Auctions may reduce the execution opportunities for these liquidity 
providers, which execution opportunities are available to other market 
participants who may be solicited or submit responses. The Exchange 
believes providing appointed Market-Makers with an additional way to 
participate in electronic auctions will expand available liquidity for 
these auctions, which may increase execution and price improvement 
opportunities for customers' orders.
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    \3\ The ``Initiating Order'' is the order comprised of principal 
interest or a solicited order(s) submitted to trade against the 
order the submitting Trading Permit Holder (the ``Initiating TPH'' 
or ``Initiating FLEX Trader,'' as applicable) represents as agent 
(the ``Agency Order'').
    \4\ The proposed rule change amends the introductory paragraph 
of Rule 5.73 to add an end quotation market to the defined term 
``Initiating FLEX Trader'' in the parenthetical, which was 
inadvertently omitted.
    \5\ See Securities Exchange Act Release No. 87072 (September 24, 
2019), 84 FR 51673 (September 30, 2019) (SR-CBOE-2019-045).
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    No similar restriction applies to crossing transactions in open 
outcry trading.\6\ Brokers seeking liquidity to execute against 
customer orders on the trading floor regularly solicit appointed 
Market-Makers in the applicable class for this liquidity, as they are 
generally the primary source of liquidity in a class (as noted above). 
Therefore, the Exchange believes the proposed rule change will further 
align open outcry and electronic crossing auctions and the execution 
and price improvement opportunities available in both auctions by 
permitting the same participants to be solicited as contras in both 
types of auctions across all classes at all times.
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    \6\ See Rules 5.86 and 5.87.
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    As of March 16, 2020, the Exchange suspended open outcry trading to 
help prevent the spread of the novel coronavirus and began operating in 
an all-electronic configuration.\7\ As a result, the Exchange adopted a 
temporary rule change to permit Market-Makers to be solicited for 
electronic crossing transactions in its exclusively listed index 
options when the Exchange's trading floor was inoperable. The Exchange 
believed this would help ensure the same sources of liquidity for 
customer orders that executed in open outcry would be available for 
those orders in an electronic-only environment.\8\ The Exchange 
believed not permitting Market-Makers to participate as contras could 
have created a risk that brokers may have difficulty finding sufficient 
liquidity to fill their customer orders that may currently be traded 
against orders from solicited Market-Makers appointed in the applicable 
class. For example, when the Exchange operates in its normal hybrid 
manner (with electronic and open outcry trading), if a customer order 
is not fully executable against electronic bids and offers, a floor 
broker can attempt to execute the order, or remainder thereof, on the 
trading floor, where the liquidity to trade with this remainder is 
generally provided by Market-Makers in the open outcry trading crowd. 
Additionally, brokers may solicit liquidity from upstairs Market-Maker 
firms.
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    \7\ The Exchange continues to operate in an all-electronic 
environment, but currently plans to reopen its trading floor on June 
8, 2020.
    \8\ See Rule 5.24(e)(1)(A); see also Securities Exchange Act 
Release No. 88886 (May 15, 2020), 85 FR 31008 (May 21, 2020) (SR-
CBOE-2020-047).
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    The Exchange believes appointed Market-Makers should have the 
ability to provide liquidity to these electronic auctions, including 
when the Exchange is operating in its normal hybrid trading 
environment. Market-Makers are subject to quoting obligations and must 
expend resources to comply with these obligations to provide liquidity 
to the lit market. Given these additional costs and obligations, the 
Exchange does not believe these Market-Makers should have fewer 
execution opportunities with respect to volume submitted for execution 
through AIM auctions and not for electronic execution against interest 
in the book. The Exchange believes there is no reason to restrict 
Market-Makers' ability to provide liquidity into electronic auctions 
when they are able to similarly provide that liquidity in open outcry 
trading. By permitting brokers to solicit primary liquidity providers 
in a class for electronic auctions, regardless of whether the trading 
floor is operational, the Exchange believes brokers will be able to 
more efficiently locate liquidity to fill their customer orders, 
particularly during times of volatility, which may create additional 
execution and price improvement opportunities for customers at all 
times.
    Appointed Market-Makers frequently serve as contra parties to 
crossing transactions on the trading floor. For example, during the 
last week of February 2020 (when the trading floor was open), over 70% 
of open outcry trades (consisting of over 30% of volume) across all 
classes executed on the trading floor consisted of a crossing 
transaction that included an order of a Market-Maker one side of the 
transaction. This demonstrates the importance of the liquidity 
appointed Market-Makers to the market with respect to crossing 
transactions, which they are currently unable to do with respect to 
electronic crossing transactions.
    The Exchange notes solicited orders submitted as the Initiating 
Order for AIM Auctions are almost always comprised of orders for the 
accounts of away market-makers. For example, in April of 2020, 
approximately 99.6% of the orders submitted into all AIM Auctions had 
Initiating Orders comprised of orders for accounts of away market-
makers, making up approximately 86.2% of the volume executed through 
AIM auctions. The Exchange understands these away market-makers often 
serve as both appointed Market-Makers on the Exchange and market-makers 
on other options exchanges, and thus have accounts for both purposes. 
These firms, as a result, can use their accounts for their away market-
maker activities for being solicited with respect to AIM Auctions. 
Therefore, the Exchange believes the current restriction has a negative 
impact on the ability of firms that serve as Market-Makers on the 
Exchange but not other options exchanges, as well as Market-Makers for 
single or exclusively listed classes, to participate in AIM Auctions. 
During April 2020, when Initiating Orders could be comprised of orders 
for accounts of appointed Market-Makers pursuant to a temporary rule, 
while approximately 81.5% of the orders in exclusively listed index 
options submitted into all AIM Auctions had Initiating Orders comprised 
of orders for accounts of away market-makers, these orders represented 
only approximately 12.2% of the volume executed through AIM Auctions. 
The majority of the volume was represented by orders for accounts of 
appointed Market-Makers. This demonstrates the difficulty brokers have 
to find sufficient interest to fill customer orders in these classes 
when appointed Market-Makers may not be solicited. The Exchange 
believes there is no reason to not permit Initiating Orders to be 
comprised of orders for the accounts of appointed Market-Makers in all 
classes at all times. The Exchange believes the proposed rule change 
will provide all firms that act as Market-Makers on the Exchange in all 
classes with consistent access to AIM Auctions, which may further 
increase liquidity in these auctions and price improvement 
opportunities for customers.
    The proposed rule change also amends Rules 5.37(c)(5) and 
5.73(c)(5) to codify that any User or FLEX Trader, respectively, other 
than the Initiating TPH or FLEX Trader, respectively, may submit 
responses to AIM and FLEX AIM Auctions. As set forth in Rules 5.37(e) 
and 5.73(e), the Initiating Order may receive an entitlement of 40% or 
50% of the Agency Order. The Exchange believes it is appropriate to not 
permit the Initiating TPH or Initiating FLEX Trader, as applicable, to 
also submit

[[Page 36909]]

responses in order to try to trade against a larger percentage of the 
Agency Order. This is consistent with allocation rules, pursuant to 
which the Initiating Order may only receive more than 40% or 50%, as 
applicable, of the Agency Order if there are remaining contracts after 
all other interest has executed.
    The Rule change also notes that the System will reject a response 
with the same EFID \9\ as the Initiating Order. The Exchange notes that 
orders for the same User may have different EFIDs. However, the rule 
prohibits all responses from the same User, even with different EFIDs. 
The System is currently only able to reject responses with the same 
EFID as the Initiating Order, which is why that is specified in the 
proposed rule. If the same User submits a response to an auction in 
which that same User had an order comprising the Initiating Order (even 
with a different EFID), the Exchange may take regulatory action against 
that User for a violation of the proposed rule. The Exchange currently 
applies this restriction to simple AIM and FLEX AIM Auctions, but it 
was inadvertently omitted from the Rules, so the proposed rule change 
adds transparency to the Rules. This restriction is also currently in 
the Rules related to AIM for complex orders, so the proposed rule 
change adds consistency to the rules of Exchange auctions.\10\
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    \9\ See Rule 1.1, which defines EFID as an Executing Firm ID.
    \10\ See Rule 5.38(c)(5).
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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.\11\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \12\ 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) \13\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
    \13\ Id.
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    In particular, the Exchange believes the proposed rule change will 
benefit investors. The proposed rule change will provide the primary 
liquidity providers on the Exchange with an additional way to 
participate in electronic auctions. Additionally, by permitting brokers 
to solicit primary liquidity providers in a class for electronic 
auctions, regardless of whether the trading floor is operational, the 
Exchange believes brokers will be able to more efficiently locate 
liquidity to fill their customer orders, particularly during times of 
volatility. As a result, the Exchange believes the proposed rule change 
will likely expand available liquidity for these auctions, which may 
create additional execution and price improvement opportunities for 
customers at all times, which ultimately benefits investors.
    The Exchange also believes the proposed rule change will promote 
just and equitable principles of trade and remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system because it will further align open outcry and electronic 
crossing auctions and the execution and price improvement opportunities 
available in both auctions by permitting the same participants to be 
solicited as contras in both types of auctions across all classes. 
Currently, appointed Market-Makers may be solicited with respect to 
crossing transactions on the trading floor but may not be solicited 
with respect to electronic crossing transactions. The Exchange believes 
there is no reason to restrict Market-Makers ability to provide 
liquidity into electronic auctions when they are able to similarly 
provide that liquidity in open outcry trading. The Exchange notes the 
electronic crossing price improvement auction of another options 
exchange currently permits orders for the accounts of appointed market-
makers to be solicited as the contra orders for that auction.\14\
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    \14\ See NYSE Arca, Inc. (``Arca'') Rule 971.1NY.
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    Finally, the Exchange believes the proposed rule change is not 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers because it will be permit orders for accounts of 
appointed Market-Makers to be solicited in the same manner as orders 
for the accounts of all other market participants. Currently, all 
market participants other than appointed Market-Makers may be solicited 
as the contra and submit responses in AIM Auctions, while appointed 
Market-Makers are restricted to only submitting responses. Given the 
additional costs and obligations associated with being an appointed 
Market-Maker, the Exchange does not believe these Market-Makers should 
have fewer execution opportunities with respect to volume submitted for 
execution through AIM auctions and not for electronic execution against 
interest in the book. This is particularly true for Market-Makers that 
do not serve in a market-making capacity on other exchanges or that 
serve as a Market-Maker in a singly or exclusively listed class. While 
it is possible for an order to be solicited for the account of an away 
market-maker in a singly or exclusively listed class, it is less common 
given the order must be for market-making purposes with respect to that 
class. The Exchange believes the proposed rule change will provide all 
Market-Makers on the Exchange with the same ability to participate in 
AIM in all classes at all times. This may further increase execution 
and price improvement opportunities for customers, particularly those 
that submit orders in singly or exclusively listed classes where the 
ability for away market-makers to provide liquidity is limited.
    The Exchange believes the proposed rule change to codify that any 
User or FLEX Trader, respectively, other than the Initiating TPH or 
FLEX Trader, respectively, may submit responses to AIM and FLEX AIM 
Auctions will promote just and equitable principles of trade so that 
market participants may not trade against a larger percentage of the 
Agency Order than permitted by the rules. The proposed rule change is 
consistent with allocation rules. The proposed rule change is 
consistent with current functionality and the rules related to AIM for 
complex orders, and therefore adds consistency and transparency to the 
Rules, which ultimately benefits investors.

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. The Exchange does not 
believe the proposed rule change will impose any burden on intramarket 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act because it provides the same execution 
opportunities in AIM Auctions to appointed Market-Makers that are

[[Page 36910]]

currently available to all other market participants. Additionally, the 
proposed rule change it will further align open outcry and electronic 
crossing auctions and the execution and price improvement opportunities 
available in both auctions by permitting the same participants to be 
solicited as contras in both types of auctions across all classes. The 
Exchange does not believe the proposed rule change will impose any 
burden on intermarket competition that is not necessary or appropriate 
in furtherance of the purposes of the Act because it relates to orders 
submitted into an auction mechanism on the Exchange. Additionally, the 
Exchange notes that the rules of at least one other options exchange 
permits orders for the accounts of appointed market-makers to be 
solicited as contra orders for that exchange's electronic crossing 
price improvement auction.\15\ The Exchange believes the proposed rule 
change may improve price competition within AIM Auctions, because the 
primary liquidity providers will be able to increase participation in 
AIM Auctions.
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    \15\ See Arca Rule 971.1NY.
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    The Exchange believes the proposed rule change to codify that any 
User or FLEX Trader, respectively, other than the Initiating TPH or 
FLEX Trader, respectively, may submit responses to AIM and FLEX AIM 
Auctions will not impose any burden on intramarket competition that is 
not necessary or appropriate in furtherance of the purposes of the Act, 
because it codifies current system functionality. Additionally, it 
applies to all market participants that submit orders into AIM 
Auctions. The Exchange believes the proposed rule change will not 
impose any burden on intermarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act, because it 
relates solely to which market participants may submit responses into 
Exchange auction. The proposed rule change is consistent with current 
allocation rules and the rules related to AIM for complex orders, and 
therefore adds consistency and transparency to the Rules, which 
ultimately benefits investors.

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

    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-CBOE-2020-050 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-CBOE-2020-050. 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-CBOE-2020-050, and should be submitted 
on or before July 9, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-13122 Filed 6-17-20; 8:45 am]
BILLING CODE 8011-01-P