
[Federal Register Volume 79, Number 50 (Friday, March 14, 2014)]
[Notices]
[Pages 14558-14561]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-05594]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71671; File No. SR-NYSE-2014-08]


Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing of Proposed Rule Change To Adopt the Bond Trading 
License and the Bond Liquidity Provider Programs Pursuant to NYSE Rules 
87 and 88

March 10, 2014.
    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 February 27, 2014, New York Stock Exchange LLC (``NYSE'' or 
``Exchange'') 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 self-regulatory 
organization. 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

    The Exchange proposes to amend [sic] proposes to make permanent its 
pilot program (``Pilot Program'') regarding its bond trading license 
(``BTL'') and the Bond Liquidity Provider (``BLP'') programs pursuant 
to Rules 87 and 88. The text of the proposed rule change is available 
on the Exchange's Web site at www.nyse.com, at the principal office of 
the Exchange, 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 self-regulatory organization 
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 those 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 parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    On January 19, 2011, the Exchange established a 12-month pilot 
program to (1) adopt new Rule 87 to create a BTL for member 
organizations that desire to trade only debt securities on the 
Exchange,\3\ and (2) adopt new Rule 88 to establish BLPs, a new class 
of debt market participants.\4\ The Pilot Program was extended through 
January 19, 2014 \5\ and the Exchange provided the Commission with 
written notice of its intent to extend the Pilot Program beyond such 
date.\6\ The Exchange has since determined that it is more appropriate 
at this time to seek the Commission's approval to make the Pilot 
Program permanent. Accordingly, the Exchange is proposing to make 
permanent the Pilot Program and adopt Rules 87 and 88 on a permanent 
basis.
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    \3\ Debt securities are traded on the Exchange pursuant to Rules 
86, 1400, and 1401. Bonds eligible to trade on the NYSE Bonds 
platform include any debt instrument that is listed on the NYSE and 
any corporate debt of a listed company of the Exchange.
    \4\ See Securities Exchange Act Release No. 63736 (January 19, 
2011), 76 FR 4959 (January 27, 2011) (order approving SR-NYSE-2010-
74). See also Securities Exchange Act Release No. 63444 (December 6, 
2010), 75 FR 77024 (December 10, 2010) (notice of filing of SR-NYSE-
2010-74).
    \5\ See Securities Exchange Act Release No. 68533 (December 21, 
2012), 77 FR 77166 (December 31, 2012) (SR-NYSE-2012-74).
    \6\ On January 10, 2014, pursuant to Rule 19b-4(f)(6)(iii), the 
Exchange submitted NYSE-2014-1P through the Commission's Electronic 
Form 19b-4 Filing System (``EFFS''), which provided the Commission 
with written notice of the Exchange's intent to file a rule change 
to extend the Pilot Period. See 17 CFR 240.19b-4(f)(6)(iii). On 
January 16, 2014, NYSE-2014-1P was marked acceptable in the EFFS.
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    The purpose of Pilot Program is to encourage market participants to 
bring additional liquidity to the Exchange's bond marketplace by 
providing incentives for quoting and adding liquidity to the market and 
to offer investors an alternative to over-the-counter trading for debt 
securities. Under Rule 87, a member organization that chooses to trade 
only bonds, or a new member organization that desires to trade only 
bonds, may apply for a BTL, which is available to any approved member 
organization. A BTL license is not transferable and may not, in whole 
or in part, be transferred, assigned, sublicensed or leased. However, 
the holder of the BTL could, with the prior written consent of the 
Exchange, transfer a BTL to a qualified and approved member 
organization (i) that is an affiliate or (ii) that continues

[[Page 14559]]

substantially the same business of such BTL holder without regard to 
the form of the transaction used to achieve such continuation, e.g., 
merger, sale of substantially all assets, reincorporation, 
reorganization or the like. The Exchange currently has one member 
organization operating under a BTL, but has been notified that 
additional market participants are interested in applying for a BTL.
    Under Rule 88, the Exchange provides incentives for quoting and 
adding liquidity to the bond market in the form of rebates to BLPs that 
provide liquidity to the Exchange's bond market. The Exchange believes 
that the rebates encourage the additional utilization of, and 
interaction with, the Exchange, improve price discovery and liquidity, 
and encourage competitive quotes and price improvement opportunities. 
These incentives encourage BLPs to make more liquid and competitive 
markets. In return, BLPs must meet certain qualification and quoting 
obligations under the Rule.
    Specifically, pursuant to Rule 88(a), a BLP is required to 
maintain: (1) A bid at least seventy percent (70%) of the trading day 
for a bond; (2) an offer at least seventy percent (70%) of the trading 
day for a bond; and (3) a bid or offer at the Exchange's Best Bid 
(``BB'') or Exchange's Best Offer (``BO'') at least five percent (5%) 
of the trading day in each of its bonds in the aggregate. To create a 
financial incentive to serve as a BLP, Rule 88(b) provides that a BLP 
that meets the quoting requirement for a bond as described in paragraph 
(a) would receive the liquidity provider rebate set forth in the 
Exchange's Price List.
    To qualify as a BLP pursuant to Rule 88(c), a member organization 
is required to: (1) Demonstrate an ability to meet the quoting 
requirements of a BLP; (2) have mnemonics that identify to the Exchange 
BLP trading activity in assigned BLP bonds; (3) have adequate trading 
infrastructure and technology to support electronic trading.
    Because a BLP is only permitted to trade electronically from off 
the Floor of the Exchange, a member organization's off-Floor technology 
must be fully automated to accommodate the Exchange's trading and 
reporting systems that are relevant to operating as a BLP. If a member 
organization were unable to support the relevant electronic trading and 
reporting systems of the Exchange for BLP trading activity, it would 
not qualify as a BLP.
    Pursuant to Rule 88(d), to become a BLP, a member organization is 
required to submit a BLP application form with all supporting 
documentation to the Exchange. The Exchange determines whether an 
applicant is qualified to become a BLP as set forth above. After an 
applicant submits a BLP application to the Exchange, with supporting 
documentation, the Exchange notifies the applicant member organization 
of its decision. If an applicant is approved by the Exchange to act as 
a BLP, the applicant is required to establish connectivity with 
relevant Exchange systems before the applicant is permitted to trade as 
a BLP on the Exchange. In the event an applicant is disapproved or 
disqualified under proposed Rule 88(d)(4) or (i)(2) by the Exchange, 
such applicant may request an appeal of such disapproval or 
disqualification by the Exchange as provided in Rule 88(j), and/or 
reapply for BLP status three (3) months after the month in which the 
applicant received disapproval or disqualification notice from the 
Exchange.
    Pursuant to Rule 88(e), a BLP is permitted to withdraw from the 
status of a BLP by providing notice to the Exchange. Such withdrawal is 
effective when those bonds assigned to the withdrawing BLP are 
reassigned to another BLP. After the Exchange receives the notice of 
withdrawal from the withdrawing BLP, the Exchange reassigns such bonds 
as soon as practicable, but no later than 30 days of the date the 
notice was received by the Exchange. If the reassignment of bonds takes 
longer than the 30-day period, the withdrawing BLP has no further 
obligations and is not held responsible for any matters concerning its 
previously assigned BLP bonds.
    Rule 88(f) sets forth how the Exchange calculates a BLP's quoting 
requirements. Beginning with the first month of operation as a BLP, the 
BLP must satisfy the 70% quoting requirement for each of its assigned 
BLP bonds. The Exchange determines whether a BLP met its 70% quoting 
requirement by determining the average percentage of time a BLP was at 
a bid (offer) in each of its BLP bonds during the regular trading day 
\7\ on a daily and monthly basis. The Exchange determines whether a BLP 
has met this requirement by calculating the following:
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    \7\ ``Trading day'' means any day on which the Exchange is 
scheduled to be open for business. Days on which the Exchange closes 
prior to 4 p.m. (Eastern Time) for any reason, which may include any 
regulatory halt or trading halt, are considered a trading day.
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     A ``Daily Bid Quoting Percentage'' is calculated by 
determining the percentage of time a BLP had at least 10 displayed BLP 
bonds at a single price level in an Exchange bid during each trading 
day for a calendar month;
     A ``Daily Offer Quoting Percentage'' is calculated by 
determining the percentage of time a BLP had at least 10 displayed BLP 
bonds at a single price level in an Exchange offer during each trading 
day for a calendar month;
     A ``Monthly Average Bid Quoting Percentage'' is calculated 
for each BLP bond by summing the bond's ``Daily Bid Quoting 
Percentages'' for each trading day in a calendar month then dividing 
the resulting sum by the total number of trading days in such calendar 
month; and
     A ``Monthly Average Offer Quoting Percentage'' is 
calculated for each BLP bond by summing the bond's ``Daily Offer 
Quoting Percentage'' for each trading day in a calendar month then 
dividing the resulting sum by the total number of trading days in such 
calendar month.
    Only displayed orders entered throughout the trading day are used 
when calculating whether a BLP is in compliance with its 70% average 
quoting requirements.
    The BLP's 5% quoting requirements is not in effect during the first 
two months of operation as a BLP in order to allow the BLP time to 
achieve this quoting metric. The 5% quoting requirement takes effect in 
the third month of a BLP's operation. At that time, a BLP is required 
to satisfy the 5% quoting requirement for each assigned BLP bond. The 
Exchange determines whether a BLP had met its 5% quoting requirement by 
determining the average percentage of time a BLP was at the BB or BO in 
each of its assigned BLP bonds during the regular trading day on a 
daily and monthly basis, as follows:
     A ``Daily BB Quoting Percentage'' is calculated by 
determining the percentage of time a BLP had at least one displayed BLP 
bond in an Exchange bid at the BB during each trading day for a 
calendar month;
     A ``Daily BO Quoting Percentage'' is calculated by 
determining the percentage of time a BLP had at least one displayed BLP 
bond in an Exchange offer at the BO during each trading day for a 
calendar month;
     A ``Daily BBO Quoting Percentage'' is calculated for each 
trading day by summing the ``Daily BB Quoting Percentage'' and the 
``Daily BO Quoting Percentage'' in each BLP bond; and
     A ``Monthly Average BBO Quoting Percentage'' would be 
calculated for each BLP bond by summing the bond's ``Daily BBO Quoting 
Percentages'' for each trading day in a calendar month then dividing 
the resulting sum by the total number of trading days in such calendar 
month.

[[Page 14560]]

    Only displayed orders at the BB and BO throughout the trading day 
are used when calculating whether a BLP is in compliance with its 5% 
average quoting requirement.
    Rule 88(g) sets forth how BLPs are matched to issuers. The Exchange 
matches BLPs to issuers with one or more debt issues, each of which has 
a current outstanding principal of less than $500 million. Each BLP 
would submit a list of the issuers and the issuer's bonds it would be 
willing to represent. The BLP willing to represent the most bonds for a 
given issuer would be matched to that issuer. In the event of a tie 
(i.e., two or more BLPs seeking to represent the same issuer and the 
same number of that issuer's bonds), the BLP with the highest lottery 
number from the first round would be matched with the issuer. On a 
monthly basis, BLPs are permitted to apply for unrepresented issuers. 
The BLP willing to represent the most debt issuances of an issuer is 
awarded status as a BLP for such issuer, with ties resolved by lottery.
    A BLP must represent each debt issuance of an issuer that has an 
outstanding principal of $500 million or more. A BLP also may represent 
any debt issuance below such level, but would not be required to do so. 
If a BLP is representing a debt issuance that was above $500 million 
but falls below such level, or has voluntarily been representing an 
issuance below the $500 million level where the outstanding principal 
amount has since been reduced, the BLP may cease representing such 
issue by notifying the Exchange in writing by the 15th day of the 
month, in which case the BLP may cease acting as such on the 1st day of 
the following month.
    The Exchange believes that this matching process is fair to 
approved BLPs and beneficial to issuers. In light of the unique nature 
of the debt market, the matching process gives BLPs the opportunity to 
select the issuers they want to represent and thereby take into account 
the BLP's expertise in particular issuers and sectors. The matching 
process for the largest issuers is determined on a random basis, while 
the matching process for smaller issuers is determined in favor of 
those BLPs willing to offer the broadest coverage to such issuers.
    Rule 88(i) sets forth what happens if a BLP fails to meet its 
quoting requirements. If, in any given calendar month after the first 
two months a BLP acted as a BLP, a BLP fails to meet any of the quoting 
requirements set forth in Rule 88(a), the BLP would no longer be 
eligible for the rebate for the affected bond. If a BLP's failure to 
meet the quoting requirements continues for three consecutive calendar 
months in any assigned BLP bond, the Exchange could, in its discretion, 
take one or more of the following actions: (i) Revoke the assignment of 
all of the affected issuer's bonds from the BLP; (ii) revoke the 
assignment of an additional unaffected issuer from a BLP; or (iii) 
disqualify a member organization from its status as a BLP.
    The Exchange, in its sole discretion, would determine if and when a 
member organization is disqualified from its status as a BLP. One 
calendar month prior to any such determination, the Exchange would 
notify a BLP of such impending disqualification in writing. When 
disqualification determinations are made, the Exchange would provide a 
disqualification notice to the member organization.
    If a member organization were disapproved pursuant to Rule 88(d)(2) 
or disqualified from its status as a BLP pursuant to Rule 88(i)(1)(C), 
such member organization could re-apply for BLP status three calendar 
months after the month in which the member organization received its 
disqualification notice.
    Pursuant to Rule 88(j), in the event a member organization disputes 
the Exchange's decision to disapprove or disqualify it under Rule 
88(d)(4) or (i)(2), such member organization (``appellant'') may 
request, within five (5) business days of receiving notice of the 
decision, the Bond Liquidity Provider Panel (``BLP Panel'') to review 
all such decisions to determine if such decisions were correct. In the 
event a member organization is disqualified from its status as a BLP 
pursuant to Rule 88(i)(2), the Exchange will not reassign the 
appellant's bonds to a different BLP until the BLP Panel has informed 
the appellant of its ruling.
    The BLP Panel consists of the NYSE's Chief Regulatory Officer 
(``CRO''), or a designee of the CRO, and two (2) officers of the 
Exchange designated by the Co-Head of U.S. Listings and Cash Execution. 
The BLP Panel will review the facts and render a decision within the 
time frame prescribed by the Exchange. The BLP Panel may overturn or 
modify an action taken by the Exchange and all determinations by the 
BLP Panel will constitute final action by the Exchange on the matter at 
issue.
    The Exchange believes that the Pilot Program has provided value to 
the bonds marketplace as the Exchange is the only marketplace that 
offers pre-trade transparency and real-time reporting of trading in 
debt securities. The Exchange believes that making the Pilot Program 
permanent will continue to encourage trading of debt securities on a 
transparent market and reduce the opportunities for anti-competitive 
practices.\8\ The Exchange therefore believes it is appropriate for it 
to maintain its BTL and BLP Programs on a permanent basis in order to 
continue to compete in the retail bond market, thereby encouraging 
market participants to bring additional liquidity to the Exchange's 
transparent bond marketplace.
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    \8\ Commissioner Michael S. Piwowar recently noted the need to 
improve how the fixed-income market operates, including how more 
transparency could benefit investors. See ``Advancing and Defending 
SEC's Core Mission,'' Remarks by Commissioner Piwowar to the U.S. 
Chamber of Commerce, Washington, DC (Jan 27, 2014), http://www.sec.gov/News/Speech/Detail/Speech/1370540671978.
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    The proposed change is not otherwise intended to address any other 
issues or make any other amendments to Rules 87 and 88 and the Exchange 
is not aware of any problems that member organizations would have in 
complying with the proposed change.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\9\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\10\ in particular, because it 
is designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to remove 
impediments to, and perfect the mechanisms 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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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes the proposed rule change is designed to 
prevent fraudulent and manipulative acts and practices and to promote 
just and equitable principles of trade because it seeks to make 
permanent a Pilot Program that is designed to encourage market 
participants to bring additional liquidity to the only transparent bond 
market. The Exchange believes the proposed rule change is designed to 
facilitate transactions in securities and to remove impediments to, and 
perfect the mechanisms of, a free and open market and a national market 
system because making the Pilot Program permanent would expand the 
number of member organizations that can trade debt securities on the 
Exchange and enable the Exchange to continue to create incentives for 
BLPs to provide additional liquidity to the only transparent bond 
market. The Exchange believes that making the Pilot Program

[[Page 14561]]

permanent protects investors and the public interest because investors 
benefit from the availability of a transparent market for bonds 
trading, as well as the increased competition and liquidity in the 
bonds marketplace that the Pilot Program has offered. Finally, the 
Exchange believes that it is subject to significant competitive forces, 
as described below in the Exchange's statement regarding the burden on 
competition, and making the Pilot Program permanent will support the 
continued availability of a transparent market in this highly 
competitive environment. For these reasons, the Exchange believes that 
the proposal to make the Pilot Program permanent is consistent with the 
Act.
    Finally, recognizing the statements of Commissioners who have 
expressed concern about the state of the U.S. corporate and municipal 
bond markets as well as recommendations outlined in the Commission's 
release of its Report on the Municipal Securities Market (Report), the 
Exchange believes that BLPs, by meeting their quoting requirements, 
will be an important participant in the democratization of the fixed 
income market.\11\ As highlighted in SEC Chair White's statement during 
the SEC's 2013 Roundtable on Fixed Income Markets, the Report makes 
recommendations that include (1) improving pre- and post-trade 
transparency; (2) promoting the use of transparent and open trading 
venues, and (3) requiring dealers to seek ``best execution'' for 
customers and to provide customers with relevant pricing information in 
connection with their transactions.\12\ Achieving these recommendations 
and applying them to both the municipal and corporate bond markets 
would, in our view, assist in lowering the systemic risk that is 
anticipated to increase as interest rates rise and the closed network 
of bond trading comes under pressure as retirement and pension managers 
seek to adjust their positions.
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    \11\ See SEC Report on the Municipal Securities Market, July 
2012. http://www.sec.gov/news/studies/2012/munireport073112.pdf; 
``SEC's Gallagher Says Retail Bond Investors Fighting `Headwinds' 
'', Jesse Hamilton, Bloomberg News. Sep 20, 2012. See http://www.bloomberg.com/news/2012-09-19/sec-s-gallagher-says-retail-bond-investors-fighting-headwinds-.html.
    \12\ See Opening remarks of Chairman Mary Jo White at SEC 
Roundtable on Fixed Income Markets. http://www.sec.gov/News/Speech/Detail/Speech/1365171515300.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    In accordance with Section 6(b)(8) of the Act,\13\ the Exchange 
believes that the proposed rule change would not impose any burden on 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act. The Exchange believes that the Pilot Program has 
promoted liquidity and competition in the marketplace and is designed 
to improve market quality and making the Pilot Program permanent would 
continue these benefits.
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    \13\ 15 U.S.C. 78f(b)(8).
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    The Exchange notes that it operates in a highly competitive market 
in which market participants can readily favor competing venues that 
are not transparent. In such an environment, the Exchange must 
continually review, and consider adjusting the services it offers and 
the requirements it imposes to remain competitive with other U.S. bond 
trading platforms. For the reasons described above, the Exchange 
believes that the proposed rule change reflects this competitive 
environment by making permanent a program that promotes transparency, 
competition, and liquidity in the bond marketplace.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to 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 (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the 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 rule-comments@sec.gov. Please include 
File Number SR-NYSE-2014-08 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-NYSE-2014-08. 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 Web site (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 Web site 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; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NYSE-2014-08 and should be 
submitted on or before April 4, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-05594 Filed 3-13-14; 8:45 am]
BILLING CODE 8011-01-P


