[Federal Register Volume 86, Number 50 (Wednesday, March 17, 2021)]
[Notices]
[Pages 14661-14664]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-05448]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-91299; File No. SR-Phlx-2021-03]
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing
of Amendment No. 1 and Order Granting Accelerated Approval of a
Proposed Rule Change, as Modified by Amendment No. 1, To Modify Phlx
Options 8, Section 26, ``Trading Halts, Business Continuity and
Disaster Recovery''
March 11, 2021.
I. Introduction
On January 7, 2021, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'')
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 to
modify Phlx Options 8, Section 26 (Trading Halts, Business Continuity
and Disaster Recovery) to make available an audio and video
communication program to serve as a ``virtual trading crowd'' in the
event the physical trading floor becomes unavailable, the back-up
trading floor becomes inoperable or the Exchange otherwise determines
not to operate its back-up trading floor. The proposed rule change was
published in the Federal Register on January 14, 2021.\3\ On February
26, 2021, pursuant to Section 19(b(2) of the Act,\4\ the Commission
designated a longer period within which to either approve the proposed
rule change, disapprove the proposed rule change, or institute
proceedings to determine whether to disapprove the proposed rule
change.\5\ On March 2, 2021, the Exchange filed Amendment No. 1 to the
proposed rule change, which replaced and superseded the proposed rule
change.\6\ This order approves the proposed rule change, as modified by
Amendment No. 1.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 90880 (January 8,
2021), 86 FR 3217 (``Notice'').
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 91220, 86 FR 12733
(March 4, 2021). The Commission designated April 14, 2021, as the
date by which it should approve, disapprove, or institute
proceedings to determine whether to disapprove the proposed rule
change.
\6\ In Amendment No. 1, the Exchange made technical corrections
and revisions to the proposed rule text for readability and
consistency. Amendment No. 1 is available on the Commission's
website at: https://www.sec.gov/comments/sr-phlx-2021-03/srphlx202103-8436948-229661.pdf.
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II. Description of the Proposed Rule Change, as Modified by Amendment
No. 1
Options 8, Section 26(g)(1) currently provides that if the physical
location designated as the ``Trading Floor'' becomes unavailable, Phlx
will enact its Business Continuity Plan (``BCP'') and designate the
Philadelphia Navy Yard as its ``Back-Up Trading Floor.'' Further, in
the event that the Back-Up Trading Floor becomes inoperable, the
Exchange will only operate its electronic market and will not operate a
Trading Floor.\7\ The Exchange will operate only its electronic market
until the Exchange's Trading Floor facility is operational.\8\ Open
outcry trading will not be available in the interim.\9\
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\7\ See Phlx Options 8, Section 26(g)(2).
\8\ Id.
\9\ Id.
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On March 17, 2019, Phlx closed the Trading Floor as a result of
precautions taken with respect to COVID-19 and operated in an all-
electronic configuration during that time.\10\ Due to the uncertainty
related to the ongoing pandemic, which includes the possibility of
having to close the Trading Floor again, the Exchange now has proposed
to adopt Options 8, Section 26(g)(3) to permit open outcry trading to
take place in an audio and video communication program to serve as a
``virtual trading crowd'' if the Trading Floor becomes unavailable, the
Back-Up Trading Floor becomes inoperable or the Exchange otherwise
determines not to operate its Back-Up Trading Floor.\11\ The Exchange
represents that if it were to determine to use the virtual trading
crowd in a more permanent manner for reasons other than business
continuity purposes, the Exchange would submit a separate rule filing
to the Commission.\12\
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\10\ See Notice, supra note 3, 86 FR at 3218.
\11\ Phlx also proposes to update Options 8, Section 26(g)(1)
and (2) to specify the availability of the virtual trading crowd in
the event the Trading Floor and/or Back-Up Trading floor is
unavailable, or the Exchange otherwise determines not to operate its
Back-Up Trading Floor. See proposed Options 8, Section 26(g)(1) and
(2).
\12\ See Notice, supra note 3, 86 FR at 3218, n.8.
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In the program, the Exchange would create virtual trading crowds,
in each of which the Exchange would determine which options class(es)
will be available for trading.\13\ Phlx members would access a virtual
trading crowds via ``zones.'' \14\ Similar to the Trading Floor,
[[Page 14662]]
multiple classes may trade in a single virtual trading crowd, available
for trading in a single zone.\15\ The Exchange may designate one or
more zones.\16\ The Exchange will assign each Floor Market Maker to a
zone and Floor Brokers may determine in which zone(s) they will be
present.\17\ The Exchange believes that the proposed configuration of
the virtual trading crowd is a practical replication of the structure
of the Trading Floor that will allow market participants to interact in
nearly the same manner as they do on the Trading Floor.\18\
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\13\ The Exchange states that this is similar to the Exchange's
authority with respect to open outcry trading on the Trading Floor.
See id., 86 FR at 3218.
\14\ See proposed Options 8, Section 26(g)(3)(B)(3). A ``zone''
is a virtual room representing a virtual trading crowd. See Notice,
supra note 3, 86 FR at 3218, n.11.
\15\ See proposed Options 8, Section 26(g)(3)(B)(3).
\16\ Id.
\17\ Id. The Exchange states that this arrangement is similar to
the arrangement of the Trading Floor. See Notice, supra note 3, 86
FR at 3218, n.11.
\18\ See id., 86 FR at 3223.
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All Options 8 Rules will apply to open outcry trading in the
virtual trading crowd in the same manner as they apply to open outcry
trading on the Trading Floor, except as otherwise provided for in
proposed Options 8, Section 26(g)(3)(F), described below. Proposed
Options 8, Section 26(g)(3)(A) lists certain terms in the Rules related
to open outcry trading on the Trading Floor that will be deemed to
refer to corresponding terms related to open outcry trading in the
virtual trading crowd. Specifically:
References in the Rules to the ``floor,'' ``trading
floor,'' and ``Exchange floor'' (and any other terms with the same
meaning) will be deemed to refer to the virtual trading crowd; and
References in the Rules to ``physical presence'' or ``on-
floor'' or ``floor'' (and any other terms with the same meaning) will
be deemed to refer to ``presence'' in a virtual trading crowd.
The Exchange represents that access to the virtual trading crowd
will be substantially similar to access to the Trading Floor.\19\
Access to the virtual trading crowd will be limited to members and
member organizations, clerks, Exchange employees, and any other persons
the Exchange authorizes admission to the virtual trading crowd.\20\ The
Exchange will provide access to the virtual trading crowd to members
the Exchange has approved to perform a Trading Floor function
(including Floor Brokers and Floor Market Makers).\21\ Every member and
the member's employees in the virtual trading crowd must consent to
video and audio recording in order to participate in the virtual
trading crowd.\22\
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\19\ See Notice, supra note 3, 86 FR at 3219. The Exchange
states that, currently, admission to the Trading Floor is limited to
members and member organizations, Exchange employees, clerks
employed by members and member organizations, inactive nominees, and
Exchange visitors that receive authorized admission to the Trading
Floor pursuant to Exchange policy, and any other persons that the
Exchange authorizes admission to the Trading Floor. See id.
\20\ See proposed Options 8, Section 26(g)(3)(B). The Exchange
states that it is not proposing to amend its membership requirements
with respect to the virtual trading crowd. See Notice, supra note 3,
86 FR at 3219. Persons and entities may apply to become a Phlx
member by complying with the membership requirements described
within Phlx General 3 (Membership and Access). Id.
\21\ See Notice, supra note 3, 86 FR at 3219.
\22\ See proposed Options 8, Section 26(g)(3)(B)(1).
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Members will be required to join the virtual trading crowd via a
computer and either computer audio, cell phone, or hard-wired phone, as
determined by the Exchange.\23\ Every member must be identified within
the chat by name in place of a badge requirement.\24\ Any unidentified
attendee will be removed from the virtual trading crowd.\25\ Every
member in the virtual trading crowd must provide Market Operations with
a contact number where Market Operations will be able to reach them
during the trading day.\26\ The contact number may not be the same
number that is being used to connect to the virtual trading crowd.\27\
Floor members will be responsible for maintaining updated contact
information.\28\
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\23\ See proposed Options 8, Section 26(g)(3)(B)(2). Phlx states
that it will send a password-protected invitation to each floor
participant permitted access to the virtual trading crowd. See
Notice, supra note 3, 86 FR at 3220.
\24\ See proposed Options 8, Section 26(g)(3)(B). The Exchange
states that members would be required to join the virtual trading
crowd in a manner that clearly identifies the member or member's
employee. See Notice, supra note 3, 86 FR at 3219.
\25\ Id. The Exchange represents that it will have an audit
trail of the telephone numbers that have joined each remote
conferencing session in order to ensure that only members join the
remote conferencing feature. See id., 86 FR at 3220.
\26\ See proposed Options 8, Section 26(g)(3)(B)(2).
\27\ See id.
\28\ See id.
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Members and member organizations may use any equipment to access
the virtual trading crowd and do not need to register devices they use
while in the virtual trading crowd.\29\ Notwithstanding Options 8,
Section 28(g) and Options 8, Section 30(e), members and member
organizations would be permitted remote access to the Options Floor
Based Management System (``FBMS'') when the virtual trading floor is
enacted for purposes of executing transactions which require exposure
in open outcry.\30\
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\29\ See proposed Options 8, Section 26(g)(3)(C). The Exchange
represents that Options 8, Section 38 (Communications and Equipment)
will otherwise apply in the same manner to the virtual trading crowd
as it does to the Trading Floor (to the extent the context
requires). See Notice, supra note 3, 86 FR at 3220.
\30\ See proposed Options 8, Section 26(g)(3)(C). The Exchange
states that floor members must use Exchange-provided FBMS, to the
extent applicable, while transacting in the virtual trading crowd.
See Notice, supra note 3, 86 FR at 3220. The Exchange also
represents that all FBMS order and transaction data, as well as
compliance checks, available on the Trading Floor will continue to
be available in the virtual trading crowd. See id., 86 FR at 3219.
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The Exchange may determine to require any Floor Market Maker or
Floor Broker in a virtual trading crowd that attempts trades against an
order represented for execution to express its bid or offer in a chat
available in the remote conferencing feature.\31\ Chats will be visible
to all participants in a zone and will not be permitted directly
between individual participants.\32\ The Exchange states that it will
require members to utilize the chat function if Surveillance determines
that increased volume or activity in the virtual trading crowd warrant
mandatory use of the chat feature for members to maintain a fair and
orderly market.\33\
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\31\ See proposed Options 8, Section 26(g)(3)(D).
\32\ See proposed Options 8, Section 26(g)(3)(D). The Exchange
will retain records of the chats, consents, and any other records
related to the virtual trading crowd that are subject to the
Exchange's record retention obligations under the Act. See proposed
Options 8, Section 26(g)(3)(E).
\33\ See Notice, supra note 3, 86 FR at 3221. The Exchange
believes that the chat tool will benefit virtual trading crowd
participants due to the limitations of communication software (such
as limitations on how many people may be heard at the same time in a
virtual trading crowd or potential buffering or echoing). See id.,
86 FR at 3220-21.
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Furthermore, the Exchange proposes to set forth the following open
outcry requirements in the virtual trading crowd: \34\
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\34\ See proposed Options 8, Section 26(g)(3)(F)(1)a.-g.
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Prior to speaking on remote conferencing, each member must
announce themselves each time.
If a member experiences a technical issue accessing the
remote conferencing, the Exchange will not be responsible for
unexecuted trades.
Floor Market Maker quotes will be considered firm in the
event the Floor Market Maker is disconnected from the virtual trading
crowd and the parties have a Meeting of the Minds with respect to the
terms of the transaction. A ``Meeting of the Minds'' means the contra-
side(s) verbally confirmed participation in the trade. In the event
that a Floor Market Maker is disconnected from the virtual trading
crowd, a Floor Market Maker quote would not be considered firm if the
quote were provided and the parties did not have a Meeting of the Minds
with respect to the terms of the transaction.\35\
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\35\ Floor Market Maker quotes on the Trading Floor are
considered firm when announced in open outcry and once accepted the
transaction may be effectuated within FBMS. See Notice, supra note
3, 86 FR at 3221. Additionally, a Floor Market Maker that
experiences issues with internet connection, makes an error or
otherwise is unaware of recent news in a particular option, would be
held to a quote verbalized in open outcry. See id.
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[[Page 14663]]
FLEX Trade tickets must be sent by email to the Phlx
Correction Post.
A break-out room may be utilized to declare a dispute or
otherwise notify an Options Floor Official of any required
notifications.\36\
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\36\ The Exchanges states that it would establish a break-out
room within the remote conferencing for each dispute. See id.
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A member may not permit any other unauthorized person to
gain audio or video access to the virtual trading crowd. A member shall
not record any trading sessions.
Technical Amendments
The Exchange proposes to amend Options 8, Section 22 (Execution of
Options Transactions on the Trading Floor) to correct two incorrect
citations to Options 8, Section 35 in Options 8, Sections 22(b) and
(c).
III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change, as modified by Amendment No. 1, is consistent with the
requirements of the Act,\37\ and the rules and regulations thereunder
applicable to a national securities exchange.\38\ In particular, the
Commission finds that the proposed rule change, as modified by
Amendment No. 1, is consistent with Section 6(b)(5) of the Act,\39\
which requires, among other things, that the rules of a national
securities exchange be designed to prevent fraudulent and manipulative
acts and practices, to promote just and equitable principles of trade,
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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\37\ 15 U.S.C. 78f.
\38\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\39\ 15 U.S.C. 78f(b)(5).
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As discussed above, Phlx proposes to adopt rules to enable a
virtual trading crowd for open outcry trading when the Trading Floor
and Back-Up Trading Floor are unavailable. This would allow trading on
the Exchange to occur more similarly to physical floor trading than the
current rules for all-electronic trading in situations when the floor
becomes inoperable. Among other things, the Exchange believes that the
proposed enhancement to its BCP through the implementation of a virtual
trading crowd environment would ameliorate some of the features in open
outcry trading that are difficult to replicate in an all-electronic
environment, particularly the segment of trading strategies that
benefit from human interactions to negotiate pricing and to facilitate
executions of large orders and high-risk and complicated trading
strategies.\40\ The Exchange believes that the proposed rule change may
facilitate continued trading of these orders if and when the Trading
Floor and Back-Up Trading Floor are unavailable. As a result, the
Exchange believes that providing continuous access to open outcry
trading in these circumstances will remove impediments to a free and
open market and will ultimately benefit investors, particularly those
executing high-risk and complex trading strategies.
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\40\ See Notice, supra note 3, 86 FR at 3222.
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The Commission finds that the proposed implementation of the
virtual trading crowd for BCP purposes is consistent with the Act. The
Commission believes that the proposed virtual trading crowd will allow
the Exchange to provide a trading environment to floor members that is
reasonably designed to facilitate open outcry trading when
circumstances restrict physical human interaction on the Trading Floor
and Back-Up Trading Floor. The Commission notes that the Exchange has
conducted several town halls with floor members on the virtual trading
crowd and made the functionality available for testing so that the
Exchange will be ready to implement it if necessary. The Exchange
states that it has received positive feedback from floor members
regarding the tool and will continue to make updates as necessary and
appropriate in response to member feedback.\41\ As a result, the
Commission finds that the virtual trading crowd is reasonably designed
to allow continuous access to open outcry trading, which will remove
impediments to a free and open market and may ultimately benefit
investors, particularly those facilitating executions of large orders
and complex trading strategies.
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\41\ See id., 86 FR at 3222.
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Additionally, the design of the virtual trading zones to closely
replicate the arrangement of the physical trading floor will facilitate
the rollout of the virtual trading crowd to floor members and help
remove impediments to a free and open market when the Trading Floor and
Back-Up Trading Floor become unavailable. Virtual trading zones will
provide floor members the ability to interact in a substantially
similar way as they do on the Trading Floor. Furthermore, the proposed
chat functionality, which is not otherwise available on the Trading
Floor, is reasonably designed to create a virtual environment that
promotes fair and orderly markets by providing floor participants with
an additional tool to communicate with one another to the extent
necessary given the potential inherent limitations of communication
software.
Finally, the Commission finds that the design of the virtual
trading crowd will help prevent fraudulent and manipulative acts and
practices, and promote just and equitable principles of trade by
requiring that the Rules and regulatory requirements apply in the
substantially the same manner as open outcry on the Trading Floor.
Specifically, the Exchange represents that all Rules related to open
outcry trading, including within Options 8, will apply to open outcry
trading in a virtual trading crowd, except as otherwise provided for in
proposed Options 8, Section 26(g)(3)(F).\42\ Floor members
participating in a virtual trading crowd will be subject to the same
regulatory requirements on the virtual trading floor as they are on the
Trading Floor, including those set forth in General 8.\43\ Orders in
the virtual trading crowd must be systematized and represented, and
transactions reported, in the same manner as on the Trading Floor.\44\
The Exchange also requires that floor members use Exchange-provided
FBMS, to the extent applicable, while transacting in the virtual
trading crowd, and represents that all FBMS order and transaction data,
as well as compliance checks, available on the Trading Floor will
continue to be available in the virtual trading crowd.\45\ In addition,
Phlx Surveillance staff will remotely surveil transactions in the
virtual trading crowd, in real-time, and an Options Floor Official will
be present in each virtual trading crowd.\46\ Moreover, the Exchange
represents that it will retain records of the chats, consents, and any
other records related to the virtual trading consistent with the
Exchange's record retention obligations under the Act.\47\
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\42\ See supra notes 21-26; 30-32 and accompanying text.
\43\ See id., 86 FR at 3223.
\44\ See id.
\45\ See id., 86 FR at 3219.
\46\ See id., 86 FR at 3223. The Exchange also represents that
the Floor Surveillance Procedures will be updated to account for the
video conferencing and chat requirements, as well as any changes to
surveil a virtual trading crowd. See id.
\47\ See id., 86 FR at 3223.
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IV. Solicitation of Comments on Amendment No. 1
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether Amendment No. 1
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-Phlx-2021-03 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 No. SR-Phlx-2021-03. The 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 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 such filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. 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 publicly available. All submissions
should refer to File No. SR-Phlx-2021-03 and should be submitted on or
before April 7, 2021.
V. Accelerated Approval of Proposed Rule Change, as Modified by
Amendment No. 1
The Commission finds good cause for approving the proposed rule
change, as amended by Amendment No. 1, prior to the 30th day after the
date of publication of notice in the Federal Register. In Amendment No.
1, the Exchange made technical corrections and revisions to the
proposed rule text for readability and consistency.\48\ The Commission
notes that Amendment No. 1 does not change the substance of the
proposed rule change, but merely adds detail and clarification to
several items of the proposal. Accordingly, the Commission finds good
cause for approving the proposed rule change, as amended, on an
accelerated basis, pursuant to Section 19(b)(2) of the Act.\49\
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\48\ See Amendment No. 1, supra note 6.
\49\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\50\ that the proposed rule change, as modified by Amendment No. 1
(SR-Phlx-2021-03), be, and hereby is, approved on an accelerated basis.
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\50\ Id.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\51\
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\51\ 17 CFR 200.30-3(a)(57) and (58).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-05448 Filed 3-16-21; 8:45 am]
BILLING CODE 8011-01-P