[Federal Register Volume 89, Number 85 (Wednesday, May 1, 2024)]
[Notices]
[Pages 35289-35292]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-09325]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-100029; File No. SR-NYSEARCA-2024-05]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Instituting 
Proceedings To Determine Whether To Approve or Disapprove a Proposed 
Rule Change To List and Trade Shares of the COtwo Advisors Physical 
European Carbon Allowance Trust Under NYSE Arca Rule 8.201-E 
(Commodity-Based Trust Shares)

April 25, 2024.

I. Introduction

    On January 10, 2024, NYSE Arca, Inc. (``NYSE Arca'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to list and trade shares 
(``Shares'') of the COtwo Advisors Physical European Carbon Allowance 
Trust under NYSE Arca Rule 8.201-E. The proposed rule change was 
published for comment in the Federal Register on January 26, 2024.\3\
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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. 99409 (January 22, 
2024), 89 FR 5273 (``Notice'').
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    On March 4, 2024, pursuant to Section 19(b)(2) of the Act,\4\ the 
Commission designated a longer period within which to approve the 
proposed rule change, disapprove the proposed rule change, or institute 
proceedings to determine whether to disapprove the proposed rule 
change.\5\ The Commission has not received any comments on the proposed 
rule change. The Commission is publishing this order to institute 
proceedings pursuant to Section 19(b)(2)(B) of the Act \6\ to determine 
whether to disapprove the proposed rule change.
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    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 99668, 89 FR 16808 
(March 8, 2024). The Commission designated April 25, 2024, as the 
date by which the Commission shall approve or disapprove, or 
institute proceedings to determine whether to disapprove, the 
proposed rule change.
    \6\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposed Rule Change 7
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    \7\ Additional information regarding the Trust and the Shares 
can be found in the Notice, supra note 3.
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    The Exchange proposes to list and trade Shares of the COtwo 
Advisors Physical European Carbon Allowance Trust (``Trust'') \8\ under 
NYSE Arca Rule 8.201-E, which governs the listing and trading of 
Commodity-Based Trust Shares \9\ on the Exchange. The sponsor of the 
Trust is COtwo Advisors LLC, a Delaware limited liability company 
(``Sponsor'').
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    \8\ On May 12, 2023, the Trust filed with the Commission a 
registration statement on Form S-1 (File No. 333-271910) 
(``Registration Statement'') under the Securities Act of 1933. The 
Exchange represents that the Registration Statement is not yet 
effective, and the Shares will not trade on the Exchange until such 
time that the Registration Statement is effective. The Exchange 
further represents that the Trust will not be registered as an 
investment company under the Investment Company Act of 1940, as 
amended, and that the Trust is not a commodity pool for purposes of 
the Commodity Exchange Act, as amended. See Notice, supra note 3, 89 
FR at 5274.
    \9\ The Exchange represents that the Shares will satisfy the 
requirements of NYSE Arca Rule 8.201-E and thereby qualify for 
listing on the Exchange, and that the Trust relies on the exemption 
contained in Rule 10A-3(c)(7) regarding the application of Rule 10A-
3 (17 CFR 240.10A-3) under the Act. See Notice, supra note 3, 89 FR 
at 5274.
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Description of the Operation of the Trust

    According to the Exchange, the investment objective of the Trust 
will be for the Shares to reflect the performance of the price of EU 
Carbon Emission Allowances for stationary installations (``EUAs''), 
less the Trust's expenses.\10\ The Trust intends to achieve its 
objective by investing all of its assets in EUAs on a non-discretionary 
basis (i.e., without regard to whether the value of EUAs is rising or 
falling over any particular period).\11\ The Trust will not hold any 
assets other than EUAs and, possibly, a very limited amount of cash to 
pay Trust expenses.\12\
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    \10\ See Notice, supra note 3, 89 FR at 5274.
    \11\ See id.
    \12\ See id. The Trust may also cause the Sponsor to receive 
EUAs from the Trust in such a quantity as may be necessary to pay 
the Sponsor's annual fee. See id.
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    The Trust will not invest in futures, options, options on futures, 
or swap contracts.\13\ The Trust will not hold or trade in commodity 
futures contracts, ``commodity interests,'' or any other instruments 
regulated by the Commodity Exchange Act.\14\ The Trust's cash custodian 
may hold cash proceeds from EUA sales to pay Trust expenses. All EUAs 
will be held in the Union Registry (defined below).\15\
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    \13\ See id.
    \14\ See id.
    \15\ See id.
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    The Trust will value its Shares daily based on the value of EUAs as 
reflected by the EUA End of Day Index value, as published by the 
European Energy Exchange AG (``EEX'').\16\ The administrator of the 
Trust will determine the net asset value (``NAV'') of the Trust once 
each Exchange trading day, which will be released after the end of the 
Core Trading Session, which is typically 4 p.m. New York time \17\ When 
the Trust sells or redeems its Shares, it will do so in ``in-kind'' 
transactions with authorized participants in blocks of 50,000 
Shares.\18\
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    \16\ See id. at 5279. The EUA End of Day Index methodology is 
available at https://www.eex.com/fileadmin/EEX/Downloads/Trading/Specifications/Indeces/DE/20211005_Index_Description_v010.pdf. 
According to the Exchange, the value of the EUA End of Day Index is 
calculated based on an algorithm using data regarding the prices of 
qualifying trades and the average bids and asks of orders that meet 
certain order quantity requirements. See Notice, supra note 3, 89 FR 
at 5276. In order for data regarding trades and orders to be used 
for calculating the value of the EUA End of Day Index, the trades or 
orders must satisfy certain requirements regarding (i) quantity of 
traded contracts, (ii) quantity of contracts per order, (iii) 
minimum duration of the cumulated valid best bid and best ask, and 
(iv) maximum spread per contract. The EUA End of Day Index 
calculation methodology depends on the number of valid trades and 
orders which fulfil the product-specific parameters. See id. The 
data used for calculating the EUA End of Day Index can also come 
from fair values collected in a price committee or from other price 
sources. See id. The EUA End of Day Index price calculated is then 
validated against actual market prices. See id.
    \17\ See id. at 5279. The administrator also converts the value 
of Euro denominated assets into US Dollar equivalent using published 
foreign currency exchange prices by an independent pricing vendor. 
See id.
    \18\ See id. at 5278.
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EUAs and the EUA Markets

    According to the Exchange, the European Union Emissions Trading 
System (``EU ETS'') is a ``cap and trade'' system that caps the total 
volume of greenhouse gas emissions from installations and aircraft 
operators.\19\ The EU ETS is administered by the EU Commission, which 
issues a predefined amount of EUAs through auctions or free 
allocation.\20\ An EUA represents the right to emit one metric ton of 
carbon

[[Page 35290]]

dioxide equivalent into the atmosphere by operators of stationary 
installations (``Covered Entities'').\21\ By the end of April each 
year, all Covered Entities are required to surrender EUAs equal to the 
total volume of actual emissions from their installation for the last 
calendar year.\22\ EU ETS operators can buy or sell EUAs to achieve EU 
ETS compliance.\23\
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    \19\ There are two types of EU emissions allowances: (i) general 
allowances for stationary installations, or EUA; and (ii) allowances 
for the aviation sector. See id. at 5274. The Trust will not hold 
any assets other than EUAs and, possibly, a very limited amount of 
cash to pay Trust expenses. See id.
    \20\ See id. at 5274-75.
    \21\ See id. at 5275.
    \22\ See id.
    \23\ See id.
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    In 2012, EU ETS operations were centralized into a single EU 
registry operated by the EU Commission (the ``Union Registry''), which 
covers all countries participating in the EU ETS.\24\ According to the 
Exchange, the Union Registry is an online database that holds accounts 
for all entities covered by the EU ETS as well as for participants 
(such as the Trust) not covered under the EU ETS.\25\ An account must 
be opened in the Union Registry by a legal or natural person before 
being able to participate in the EU ETS and transact in EUAs.\26\ The 
European Union Transaction Log (``EUTL'') \27\ checks, records and 
authorizes all transactions that take place between accounts in the 
Union Registry to ensure that transfers are in accordance with the EU 
ETS rules.\28\ The Union Registry is at all times responsible for 
holding all EUAs.\29\
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    \24\ See id.
    \25\ See id.
    \26\ See id.
    \27\ The EUTL is a central transaction log that checks and 
records all transactions taking place within the EU ETS. It is run 
by the European Commission and provides an easy access to emission 
trading data contained in the EUTL. See https://www.eea.europa.eu/data-and-maps/dashboards/emissions-trading-viewer-1.
    \28\ See Notice, supra note 3, 89 FR at 5275.
    \29\ See id.
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    The spot and futures markets for EUAs have existed since 2005 after 
the formal launch of the EU ETS on January 1, 2005.\30\ Spot EUA 
contracts are traded exclusively on EEX,\31\ and futures contracts are 
traded on EEX, ICE Endex Markets B.V. (``ICE Endex''),\32\ and Nasdaq 
Oslo.\33\ Additionally, options on EUA futures contracts are traded on 
EEX and ICE Endex, but not on Nasdaq Oslo.\34\
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    \30\ See id.
    \31\ See id. See also https://www.esma.europa.eu/sites/default/files/EEX_1.pdf; and Rules and Regulations at https://www.eex.com/en/markets/trading-ressources/rules-and-regulations.
    \32\ See Notice, supra note 3, 89 FR at 5275. See also https://
www.ice.com/endex/
regulation#:~:text=The%20Dutch%20Authority%20for%20Consumers,energy%2
0industry%20and%20wholesale%20trading.
    \33\ See Notice, supra note 3, 89 FR at 5275.
    \34\ See id.
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    According to the Exchange, there are currently two primary avenues 
for trading EUAs: a primary market and a secondary market.\35\ The 
primary market involves participation in a regularly scheduled 
auction.\36\ EUA auctions are held on a near-daily basis throughout the 
year, other than between mid-December to mid-January, when auctions are 
paused.\37\ EUA auctions take place exclusively on EEX.\38\ Prices 
achieved in these auctions are published on various publicly-accessible 
websites, including the European Commission's primary website.\39\ The 
secondary market involves transactions between buyers and sellers on 
regulated markets. The contracts offered for trading are the following: 
(1) instruments with a daily expiry, including spot EUAs \40\ and a 
single day futures contract on EUAs (``Daily EUA Future''),\41\ (2) 
futures contracts with various maturities; \42\ and (3) options on 
futures contracts.\43\ There are also over-the-counter transactions, 
but, according to the Exchange, they comprise a negligible percentage 
of transactions.\44\
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    \35\ See id.
    \36\ See id.
    \37\ See id. at 5276.
    \38\ See id.
    \39\ See id.
    \40\ See id.
    \41\ See id. The Daily EUA Future is exclusively traded on ICE 
Endex and is a deliverable contract where each person with a 
position open at cessation of trading is obliged to make or take 
delivery of EUAs upon the expiration of the contract at the end of 
each trading day. See id. Each Daily EUA Future represents one lot 
of 1,000 EUAs. See id.
    \42\ See id. at 5278.
    \43\ See id.
    \44\ See id.
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    The Exchange states that the daily EUA End of Day Index value can 
be expected to be substantially identical to the daily settlement price 
of the Daily EUA Future.\45\ In support of this statement, the Exchange 
provided a comparison of the daily EUA End of Day Index value and the 
Daily EUA Future settlement price over a 45 calendar day period from 
October 26, 2023 through December 8, 2023.\46\ Additionally, the 
Exchange provided a chart showing the spot prices in continuous trading 
on the EEX and the intra-day prices of Daily EUA Futures on ICE Endex, 
in EUR/tCO2 from January 2018 to January 2022 to illustrate how the 
Daily EUA Future reflects the EUA spot price during the trading 
day.\47\
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    \45\ See id.
    \46\ See id. at 5276-77.
    \47\ See id. at 5277.
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Surveillance

    In support of its proposal, the Exchange states that trading in the 
Shares will be subject to the existing trading surveillances 
administered by the Exchange, as well as cross-market surveillances 
administered by the Financial Industry Regulatory Authority Inc. 
(``FINRA''), on behalf of the Exchange, which are designed to detect 
violations of Exchange rules and applicable federal securities 
laws.\48\ The Exchange states that these procedures are adequate to 
properly monitor Exchange trading of the Shares in all trading sessions 
and to deter and detect violations of Exchange rules and federal 
securities laws applicable to trading on the Exchange.\49\
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    \48\ See Notice, supra note 3, 89 FR at 5280. FINRA conducts 
cross-market surveillances on behalf of the Exchange pursuant to a 
regulatory services agreement. The Exchange is responsible for 
FINRA's performance under this regulatory services agreement. See 
id.
    \49\ See id.
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    The Exchange has entered into a comprehensive surveillance sharing 
agreement (``CSSA'') with ICE Endex.\50\ The Exchange states that, 
pursuant to the CSSA, it will communicate as needed regarding trading 
in the Shares and Daily EUA Futures with ICE Endex, and may obtain 
trading information regarding trading in the Shares and Daily EUA 
Futures from ICE Endex.\51\
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    \50\ See id.
    \51\ See id.
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III. Proceedings to Determine Whether To Approve or Disapprove SR-
NYSEARCA-2024-05 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \52\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of such 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the proposal. Institution of proceedings does not 
indicate that the Commission has reached any conclusions with respect 
to any of the issues involved. Rather, as described below, the 
Commission seeks and encourages interested persons to provide comments 
on the proposed rule change.
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    \52\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\53\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposal's consistency with Section 6(b)(5) of the Act, 
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,'' and ``to

[[Page 35291]]

protect investors and the public interest.'' \54\
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    \53\ Id.
    \54\ 15 U.S.C. 78f(b)(5).
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    The Commission asks that commenters address the sufficiency of the 
Exchange's statements in support of the proposal, which are set forth 
in the Notice, in addition to any other comments they may wish to 
submit about the proposed rule change. In particular, the Commission 
seeks comment on the following questions and asks commenters to submit 
data where appropriate to support their views:
    1. Given the nature of the underlying assets held by the Trust, 
what are commenters' views on whether the proposed Trust and Shares 
would be susceptible to manipulation? What are commenters' views 
generally on whether the Exchange's proposal is designed to prevent 
fraudulent and manipulative acts and practices? What are commenters' 
views generally with respect to the liquidity and transparency of the 
EUA spot and futures markets and such markets' susceptibility to 
manipulation? Are there particular features related to the EUA markets 
and the EUA ecosystem that raise unique concerns about whether the 
proposed Trust, which would hold EUAs and, possibly, a very limited 
amount of cash, would be susceptible to fraud or manipulation?
    2. According to the Exchange, EEX calculates and publishes its EUA 
End of Day Index on the price of spot EUAs. The value of the EUA End of 
Day Index is calculated based on an algorithm using data regarding the 
prices of qualifying trades and the average bids and asks of orders 
that meet certain order quantity requirements.\55\ What are commenters' 
views on whether the EUA End of Day Index is an accurate basis to price 
spot EUAs for purposes of NAV calculation and valuing the Shares of the 
Trust?
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    \55\ See Notice, supra note 3, 89 FR at 5276.
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    3. The Exchange states that ``[g]iven the significant size of ICE 
Endex, there is a reasonable likelihood that a market participant 
attempting to manipulate the Trust Shares would also have to trade on 
ICE Endex to successfully manipulate the Trust Shares.'' \56\ In 
addition, the Exchange states that ``[i]t is unlikely that trading in 
the Trust Shares would be the predominant influence on Daily EUA 
Futures prices traded on ICE Endex for a number of reasons, including 
the significant volume in and size of the EUA daily expiry market.'' 
\57\ Based on data and analysis provided by the Exchange,\58\ do 
commenters agree with the Exchange that ICE Endex, on which the Daily 
EUA Futures trade, represents a regulated market of significant size 
related to spot EUAs? \59\ What are commenters' views on whether there 
is a reasonable likelihood that a person attempting to manipulate the 
Shares would also have to trade on ICE Endex to manipulate the Shares? 
\60\ Do commenters agree with the Exchange that trading in the Shares 
would not be the predominant influence on prices in the Daily EUA 
Futures market? \61\
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    \56\ See id. at 5280-81.
    \57\ See id.
    \58\ See Notice, supra note 3.
    \59\ See Notice, supra note 3, 89 FR at 5280.
    \60\ See id.
    \61\ See id.
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    4. The Exchange states that the ``the correlation between the EUA 
End of Day Index value that reflects the value of the spot EUAs traded 
on EEX and the Daily EUA Future settlement price is nearly perfect,'' 
and ``[t]hus, on any given day, the value of an EUA purchased on EEX or 
an EUA received after settling a Daily EUA Future traded on ICE Endex 
is the same.'' \62\ The Exchange concludes that ``[w]hile it is 
possible that a potential manipulator could chose to trade only in the 
spot EUA market (EEX), the near-perfect correlation between the EUA End 
of Day Index value and the Daily EUA Future settlement price means that 
a price distortion in the spot EUA market would be reflected in the 
Daily EUA Futures market and vice versa.'' \63\ What are commenters' 
views on the correlation between the EUA End of Day Index value and the 
Daily EUA Future settlement price? What are commenters' views on the 
correlation between the spot EUA market and the ICE Endex futures 
market? What are commenters' views on the extent to which a CSSA with 
ICE Endex would assist in detecting and deterring fraud and 
manipulation that impacts an exchange-traded product that holds spot 
EUAs, and on whether the Exchange's correlation analysis \64\ provides 
any evidence to this effect?
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    \62\ See id.
    \63\ See id.
    \64\ See Notice, supra note 3.
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IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposed rule change 
is consistent with Section 6(b)(5) or any other provision of the Act, 
or the rules and regulations thereunder. Although there do not appear 
to be any issues relevant to approval or disapproval that would be 
facilitated by an oral presentation of views, data, and arguments, the 
Commission will consider, pursuant to Rule 19b-4, any request for an 
opportunity to make an oral presentation.\65\
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    \65\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposed rule change should be approved 
or disapproved by May 22, 2024. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
June 5, 2024.
    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number SR-NYSEARCA-2024-05 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-NYSEARCA-2024-05. 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 (https://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

[[Page 35292]]

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 a.m. and 3 p.m. Copies of the 
filing also will be available for inspection and copying at the 
principal office of the Exchange. Do not include personal identifiable 
information in submissions; you should submit only information that you 
wish to make available publicly. We may redact in part or withhold 
entirely from publication submitted material that is obscene or subject 
to copyright protection. All submissions should refer to file number 
SR-NYSEARCA-2024-05 and should be submitted on or before May 22, 2024. 
Rebuttal comments should be submitted by June 5, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\66\
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    \66\ 17 CFR 200.30-3(a)(57).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-09325 Filed 4-30-24; 8:45 am]
BILLING CODE 8011-01-P