[Federal Register Volume 89, Number 116 (Friday, June 14, 2024)]
[Notices]
[Pages 50658-50661]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-13050]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-100308; File No. SR-CboeBZX-2024-043]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend 
Interpretation and Policy .03 to Rule 11.13 To Provide an Additional, 
Optional Risk Setting to Members and Clearing Members

June 10, 2024.
    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 May 29, 2024, 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 
Exchange filed the proposal as a ``non-controversial'' proposed rule 
change pursuant to section 19(b)(3)(A)(iii) of the Act \3\ and Rule 
19b-4(f)(6) thereunder.\4\ The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe BZX Exchange, Inc. (the ``Exchange'' or ``BZX'') proposes to 
amend Interpretation and Policy .03 to Rule 11.13 to provide an 
additional, optional risk setting to Members and Clearing Members. The 
text of the proposed rule change is provided in Exhibit 5.
    The text of the proposed rule change is also available on the 
Exchange's website (http://markets.cboe.com/us/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.

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 \5\ 
and Clearing Members \6\ the option to utilize additional risk settings 
under proposed Interpretation and Policy .03 of Rule 11.13. Based on 
feedback from its Members, the Exchange proposes to offer additional, 
optional risk settings at the Market Participant Identifier (``MPID'') 
level and/or to a subset of orders identified within the MPID level 
(the ``risk group identifier'' level) that would authorize the Exchange 
to take automated action if a designated limit for a Member is 
breached. Such risk settings would provide Members and Clearing Members 
with enhanced abilities to manage their risk with respect to orders on 
the Exchange.\7\ Proposed paragraphs (a)(3) and (4) of Interpretation 
and Policy .03 of Rule 11.13 set forth the specific risk settings the 
Exchange proposes to offer. The current risk settings noted in 
paragraphs (a)(1)-(2) of Interpretation and Policy .03 of Rule 11.13 
will continue to be available to Members and Clearing Members. 
Specifically, the Exchange proposes to offer two aggregate credit risk 
settings (the ``Aggregate Credit Risk Checks'') as follows:
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    \5\ See Rule 1.5(n). A ``Member'' shall mean any Member or 
Sponsored Participant who is authorized to obtain access to the 
System pursuant to Rule 11.3.
    \6\ See Rule 11.15(a). 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.
    \7\ Similarly, a Sponsoring Member may utilize the check to 
manage the risk of its Sponsored Participants. A Sponsoring Member 
shall mean a broker-dealer that has been issued a membership by the 
Exchange who has been designated by a Sponsored Participant to 
execute, clear and settle transactions resulting from the System. 
The Sponsoring Member shall be either (i) a clearing firm with 
membership in a clearing agency registered with the Commission that 
maintains facilities through which transactions may be cleared or 
(ii) a correspondent firm with a clearing arrangement with any such 
clearing firm. See Rule 1.5(y). A Sponsored Participant shall mean a 
person which has entered into a sponsorship arrangement with a 
Sponsoring Member pursuant to Rule 11.3. Such sponsored 
relationships generally include where a broker-dealer allows its 
customer to use the broker-dealer's MPID or other mechanism or 
mnemonic to enter orders into the Exchange's System that bypass the 
Sponsoring Member's order handling system and are electronically 
routed directly to the Exchange by the Sponsored Participant, 
including through a service bureau or other third-party technology 
provider. See Rule 1.5(x). See also Securities Exchange Act Release 
No. 97146 (March 15, 2023), 88 FR 17065 (March 21, 2023), SR-
CboeBZX-2023-015 (``BZX Sponsored Participant Definition Filing'') 
at 17066, footnote 12.
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     The ``Aggregate Gross Credit Exposure 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 Aggregate 
Gross Credit Exposure Limit, both executed and open orders are 
included; and
     The ``Aggregate Net Credit Exposure 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 Aggregate Net Credit Exposure Limit, both executed and 
open orders are included.
    The proposed Aggregate Credit Risk Checks are nearly identical to 
credit risk settings monitoring both gross and net exposure provided 
for in paragraph (h) of Interpretation and Policy .01 of Rule 11.13, 
but with one notable difference. Importantly, the proposed Aggregate 
Credit Risk Checks would be applied at the MPID level and/or risk group 
identifier level, while the risk settings noted in paragraph (h) of 
Interpretation and Policy .01 are applied at the logical port level.\8\ 
The proposed Aggregate Credit Risk Checks are also nearly identical to 
the Gross Credit Risk Limit and Net Credit Risk Limit risk settings 
provided for in Interpretation and Policy .03(a)(1)-(2) of Rule 11.13, 
but with one notable difference. The proposed Aggregate Credit Risk 
Checks are both calculated using both executed and open orders, while 
the risk settings noted in paragraphs (a)(1)-(2) of Interpretation and 
Policy .03 are calculated using only executed orders.

[[Page 50659]]

Therefore, the proposed risk management functionality would allow a 
Member or Clearing Member to manage its risk more comprehensively, 
instead of (i) relying on the more limited port level functionality 
offered today under Interpretation and Policy .01(h) and (ii) being 
subject to limits only calculated at notional execution value under 
paragraphs (a)(1)-(2) of Interpretation and Policy .03. Stated 
differently, the calculation of the proposed Aggregate Credit Risk 
Checks will not differ from the current aggregate credit risk settings 
offered under paragraph (h) of Interpretation and Policy .01 of Rule 
11.13; however, the ability to implement aggregate credit risk limits 
at the MPID and/or risk group identifier levels will permit Members and 
Clearing Members to set credit risk limits at a more granular level. 
The Exchange also notes that the New York Stock Exchange LLC (``NYSE'') 
and MIAX Pearl equities exchange (``MIAX Pearl'') both offer risk 
settings substantially similar to the Aggregate Credit Risk Checks 
proposed by the Exchange.\9\
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    \8\ 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.
    \9\ See NYSE Rule 7.19(b)(1)(A); MIAX Pearl Equities Rule 
2618(a)(2)(E)-(F). The Exchange notes that MIAX Pearl adopted Rule 
2618(a)(2)(E)-(F) on February 13, 2023, but the functionality may 
not yet be operational. See Securities Exchange Act Release No. 
96905 (February 13, 2023), 88 FR 10391 (February 17, 2023), SR-
PEARL-2023-03 (``MIAX Risk Control Filing'').
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    In addition to the proposed Aggregate Credit Risk Checks, the 
Exchange proposes to amend paragraph (e) of Interpretation and Policy 
.03 to provide for an additional manner in which the Exchange may 
respond in the event that a risk setting is breached. Currently, the 
Exchange is authorized to automatically block new orders submitted and 
cancel all open orders in the event that a risk setting is 
breached.\10\ As proposed, paragraph (e) of Interpretation and Policy 
.03 would permit Members and Clearing Members to authorize the Exchange 
to either: (i) block new orders submitted and cancel open orders (as is 
currently permitted) or (ii) block new orders submitted without 
cancelling open orders in the event that a risk setting is breached. 
The proposed change is intended to give Members and Clearing Members 
additional flexibility in how the Exchange responds to a breach of a 
risk setting pursuant to Interpretation and Policy .03(a).
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    \10\ See Rule 11.13, Interpretation and Policy .03(e). The 
Exchange notes that 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 as orders 
entered for participation in the Opening or Closing Auction cannot 
be canceled or modified after the applicable cut-off time. See Rules 
11.23(b)(1)(B) and 11.23(c)(1)(B). Additionally, orders entered for 
participation in 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 Rule 11.28(a)-(b). Therefore, 
if a risk setting is breached after the CMC cut-off time, the CMC 
orders will not be canceled by the Exchange.
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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.\11\ 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.\12\ 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 \13\ 
by the Member. A Member that does not self-clear may allocate or revoke 
the responsibility of establishing and adjusting the risk settings 
identified in paragraph (a) to its Clearing Member via the risk 
management tool available on the web portal at any time.\14\
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    \11\ See Rule 1.5(u). 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. 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.
    \12\ A Member can designate one Clearing Member per MPID 
associated with the Member.
    \13\ See Rule 1.5(aa). ``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.''
    \14\ See Rule 11.13, Interpretation and Policy .03(c). If a 
Member revokes the responsibility of establishing and adjusting the 
risk settings identified in paragraph (a), the settings applied by 
the Member would be applicable.
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    The Exchange proposes to make the risk setting available to its 
Members upon request and will not require Members to utilize the 
Aggregate Credit Risk Checks. The Exchange will not provide 
preferential treatment to Members utilizing the Aggregate Credit Risk 
Checks. However, the Exchange believes the Aggregate Credit Risk Checks 
will offer Members another option in efficient risk management of their 
access to the Exchange. For instance, the Aggregate Credit Risk Checks 
may assist some Members in mitigating the risk of executing and/or 
submitting orders to the Exchange that would violate the Members' 
stated risk tolerance. Additionally, the proposed functionality is 
designed to assist Members and Clearing Members in the management of, 
and risk control over, their credit risk.
    Importantly, as is the case with the Exchange's existing risk 
settings, the Member, and not the Exchange, will have the full 
responsibility for ensuring that their orders comply with applicable 
securities rules, laws, and regulations. Furthermore, the Exchange does 
not believe that use of the Aggregate Credit Risk Checks can replace 
Member-managed risk management solutions, and use of the Aggregate 
Credit Risk Checks does not automatically constitute compliance with 
Exchange rules. Pursuant to Rule 15c3-5 under the Act,\15\ 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.\16\
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    \15\ 17 CFR 240.15c3-5.
    \16\ See Division of Trading and Markets, Responses to 
Frequently Asked Questions Concerning Risk Management Control for 
Brokers or Dealers with Market Access, available at https://www.sec.gov/divisions/marketreg/c-5-risk-management-controls-bd.htm.
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    In conjunction with the proposed addition of the Aggregate Credit 
Risk Checks to Interpretation and Policy .03(a), the Exchange proposes 
to remove paragraph (h) from Interpretation and Policy .01 as the 
Exchange is not required to offer or maintain risk settings and the 
existing risk settings offered under paragraph (h) of Interpretation 
and Policy .01 will be redundant with the proposed addition of the 
Aggregate Credit Risk Checks. The Exchange notes that the current risk 
settings noted in paragraph (h) of Interpretation and Policy .01 will 
continue to be available for a limited period of time following the 
addition of the proposed Aggregate Credit Risk Checks under 
Interpretation and Policy .03 in order to provide Members and Clearing 
Members adequate opportunity to transition their risk settings. The 
Exchange will announce via Exchange Notice the date on which the risk 
setting offered under Interpretation and Policy

[[Page 50660]]

.01(h) will no longer be available within 30 days of the implementation 
of the Aggregate Credit Risk Checks.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of section 6(b) of the Act.\17\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
section 6(b)(5) \18\ requirements that the rules of an exchange be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest. Additionally, 
the Exchange believes the proposed rule change is consistent with the 
section 6(b)(5) \19\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \17\ 15 U.S.C. 78f(b).
    \18\ 15 U.S.C. 78f(b)(5).
    \19\ Id.
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    In particular, the Exchange believes that the proposed Aggregate 
Credit Risk Checks and amendment to paragraph (e) of Interpretation and 
Policy .03 will remove impediments to and perfect the mechanism of a 
free and open market and a national market system because it provides 
Members and Clearing Members with additional functionality to manage 
their credit risk with respect to orders on the Exchange. In addition, 
the proposed Aggregate Credit Risk Checks are not novel as they are 
based on the Exchange's existing risk setting in Interpretation and 
Policy .01(h) of Rule 11.13. Additionally, the proposed Aggregate 
Credit Risk Checks are substantially similar to risk controls offered 
by both NYSE, which offers a Gross Credit Risk Limit,\20\ and MIAX 
Pearl, which has adopted both Gross and Net Notional Open and Trade 
Value risk settings.\21\ Therefore, Members and Clearing Members are 
already familiar with the types of protections the proposed Aggregate 
Credit Risk Checks will offer. 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.
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    \20\ Supra note 9.
    \21\ Id.
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    In addition, the Exchange believes that the proposed Aggregate 
Credit Risk Checks and amendment to paragraph (e) of Interpretation and 
Policy .03 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 risk exposure 
and reduce the potential for disruptive, market-wide events. The 
Exchange understands that its Members and Clearing Members employ a 
number of different risk-based controls, including those required by 
Rule 15c3-5. The proposed Aggregate Credit Risk Checks will serve as an 
additional tool for Members and Clearing Members to assist them in 
identifying any risk exposure. The Exchange believes the proposed 
Aggregate Credit Risk Checks will assist Members and Clearing Members 
in managing their financial exposure, which, in turn, could enhance the 
integrity of trading on the securities markets and help to assure the 
stability of the financial system.
    Finally, the Exchange believes the proposed rule change does not 
unfairly discriminate among the Exchange's Members because use of the 
proposed Aggregate Credit Risk Checks are optional and are not a 
prerequisite for participation on the Exchange. The proposed Aggregate 
Credit Risk Checks 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. Additionally, the 
removal of the risk settings offered under Interpretation and Policy 
.01(h) does not unfairly discriminate as the change applies equally to 
all Members and Clearing Members (i.e., the risk setting will not be 
available for any Member or Clearing Member) and merely results in 
Members not being able to utilize the risk setting, which, as noted 
above, the Exchange is not required to offer or maintain. Further, the 
risk settings offered under Interpretation and Policy .01(h) are 
unnecessary and redundant given the proposed Aggregate Credit Risk 
Checks, which permit Members and Clearing Members to set credit risk 
limits at a more granular level.

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. To the contrary, the 
Exchange believes that the proposed rule change may have a positive 
effect on intermarket competition because it would allow the Exchange 
to offer risk management functionality that is comparable to 
functionality offered by other national securities exchanges.\22\ 
Further, by providing Members and 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. The proposal to remove 
the risk setting offered under Interpretation and Policy .01(h) 
similarly will not impose any burden on competition because the changes 
apply to all Members and Clearing Members uniformly, as in the risk 
setting will no longer be available to any Member or Clearing Member.
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    \22\ Supra note 9.
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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.

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

    Because the foregoing proposed rule change does not:
    A. significantly affect the protection of investors or the public 
interest;
    B. impose any significant burden on competition; and
    C. become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate, it has 
become effective pursuant to section 19(b)(3)(A) of the Act \23\ and 
Rule 19b-4(f)(6) \24\ thereunder. At any time within 60 days of the 
filing of the proposed rule change, the Commission summarily may 
temporarily suspend such rule change if it appears to the Commission 
that such action is necessary or appropriate in the public interest, 
for the protection of investors, or otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the

[[Page 50661]]

Commission will institute proceedings to determine whether the proposed 
rule change should be approved or disapproved.
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    \23\ 15 U.S.C. 78s(b)(3)(A).
    \24\ 17 CFR 240.19b-4(f)(6).
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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 (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number SR-CboeBZX-2024-043 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-2024-043. 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 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-CboeBZX-2024-043 and should 
be submitted on or before July 5, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-13050 Filed 6-13-24; 8:45 am]
BILLING CODE 8011-01-P