
[Federal Register Volume 80, Number 90 (Monday, May 11, 2015)]
[Notices]
[Pages 26966-26970]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-11275]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74876; File No. SR-BOX-2015-06]


Self-Regulatory Organizations; BOX Options Exchange LLC; Notice 
of Filing of Amendment No. 1 and Order Granting Accelerated Approval of 
a Proposed Rule Change To Establish a Pilot Program, as Modified by 
Amendment No. 1, To List and Trade Options Settling to the 
RealVolTM SPY Index

May 5, 2015.

I. Introduction

    On January 21, 2015, the BOX Options Exchange LLC (the 
``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 list and trade P.M.-settled options settling to 
the RealVolTM SPY Index (``Index''). The proposed rule 
change was published for comment in the Federal Register on February 5,

[[Page 26967]]

2015.\3\ On March 18, 2015, 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\ On April 9, 2015, the Exchange filed Amendment No. 1 to the 
proposed rule change.\6\ The Commission received one comment letter on 
the proposed rule change.\7\ This Order grants approval of the proposed 
rule change, as modified by Amendment No. 1, on an accelerated basis 
for a twelve-month pilot period.
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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. 74178 (January 30, 
2015), 80 FR 6558 (February 5, 2015) (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 74526 (March 18, 
2015), 80 FR 15653 (March 24, 2015). The Commission designated a 
longer period within which to take action on the proposed rule 
change and designated May 6, 2015, as the date by which it should 
approve, disapprove, or institute proceedings to determine whether 
to disapprove the proposed rule change.
    \6\ See Amendment No. 1; see also infra notes 14-18 and 
accompanying text.
    \7\ See letter from John O'Connell, Financial Integration, to 
Commission, dated February 8, 2015 (``O'Connell Letter'').
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II. Description of the Proposed Rule Change

    The Exchange proposes to list and trade, on a pilot basis, P.M.-
settled, cash-settled, European-style options settling to the Index 
(proposed symbol VOLS \8\), for a pilot period of twelve months 
(``Pilot Program''). The Index measures the daily realized volatility 
\9\ of the SPDR S&P 500 Exchange-Traded Fund (``SPY''),\10\ based on a 
21-trading day rolling realized volatility of the daily closing price 
of SPY.
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    \8\ Options settling to the Index are hereafter referred to as 
VOLS.
    \9\ The Exchange states that realized volatility is the ``actual 
volatility,'' ``statistical volatility,'' or ``asset volatility'' 
that the underlying asset has displayed over a specific period. See 
Notice, supra note 3, at 6559.
    \10\ According to the Exchange, SPY has historically been the 
largest and most actively-traded exchange-traded fund in the United 
States as measured by its assets under management and the value of 
shares traded. See id.
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    The Index is calculated using a methodology developed by The VolX 
Group Corporation (``VolX''),\11\ and will be calculated and maintained 
by a third party calculation agent acting on behalf of VolX. The Index 
will be updated on each trading day after the close of trading of 
SPY.\12\ Although the Index is based only on daily closing values of 
SPY, a real-time version of the Index that is based on the current SPY 
price will be calculated during the trading day and disseminated at 
least every 15 seconds during the trading day to market data vendors. 
This real-time version will provide an estimate of the Index at the 
close.\13\ The Exchange states that values of the Index also will be 
disseminated to market information vendors such as Bloomberg and 
Thomson Reuters. In the event the Index ceases to be maintained or 
calculated, the Exchange will not list any additional series for 
trading and will limit all transactions in such options to closing 
transactions only for the purpose of maintaining a fair and orderly 
market and protecting investors.
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    \11\ See id. (describing in more detail the calculation 
methodology for the Index).
    \12\ According to the Exchange, if the current published value 
of SPY is not available, because of a market disruption event where 
the market cannot open and there is no closing price for SPY, for 
example, the Index will continue to be calculated and disseminated. 
The calculation of the Index will compensate for the missing day's 
returns by lowering the value of ``n'' in the formula by the number 
of days that there is no closing price for SPY. See id.
    \13\ The Exchange represents that after the market close, the 
real-time formula and the formula used calculate to the Index will 
have exactly the same value. See id. at 6559-6560 (describing in 
more detail the calculation of the real-time version of the Index).
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    The Exchange proposes that its standard trading hours for index 
options (9:30 a.m. to 4:15 p.m., Eastern time) will apply to VOLS. 
Standard VOLS will expire on the third Friday of each month. Trading in 
expiring VOLS will normally cease at 4:15 p.m. (Eastern time) on the 
business day of expiration, or, in the case of an option contract 
expiring on a day that is not a business day, on the last business day 
before its expiration. The exercise and settlement value will be 
calculated based on the Index value at the close of the last business 
day of trading, which is ultimately based on the closing price of SPY 
on the last business day of trading, for its final input value. The 
exercise-settlement amount is equal to the difference between the 
settlement value and the exercise price of the option, multiplied by 
$100. Exercise will result in the delivery of cash on the business day 
following expiration.
    The Exchange proposes to adopt minimum trading increments for VOLS 
to be $0.05 for series trading below $3, and $0.10 for series trading 
at or above $3. The Exchange also proposes to set the minimum strike 
price interval at $0.50 strike price (or greater) intervals for VOLS 
where the strike price is less than $75; $1 strike price (or greater) 
intervals where the strike price is $200 or less; and $5 strike price 
(or greater) intervals where the strike price is greater than $200.
    Amendment No. 1 corrects an inaccurate statement in the Notice 
regarding the exercise price range limitations for new series of index 
options.\14\ Under the Exchange's rules, when new series of index 
options with a new expiration date are opened for trading, or when 
additional series of index options in an existing expiration date are 
opened for trading, as the current value of the underlying index moves 
substantially from the exercise prices of series already opened, the 
exercise prices of such new or additional series shall be reasonably 
related to the current value of the underlying index at the time such 
series are first opened for trading.\15\ The term ``reasonably related 
to the current index value of the underlying index'' means that the 
exercise price is within 30% of the current index value, as defined in 
BOX Rule 6090(c)(4).\16\ In the Notice, the Exchange stated that it 
proposed to eliminate, for VOLS, the range limitation in BOX Rule 
6090(c)(3) requiring the exercise prices of new or additional series of 
index options to be reasonably related to the current value of the 
underlying index at the time such series are first opened for trading. 
The Notice erroneously stated that the Exchange's proposal to permit 
exercise prices without a range limitation would be identical to those 
adopted by the Chicago Board Options Exchange, Incorporated (``CBOE'') 
for options on the CBOE Volatility Index (``VIX'').\17\ Amendment No. 1 
provides that the exercise price ranges for VOLS will be subject to the 
exercise price range limitations under BOX Rule 6090(c)(3).\18\
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    \14\ See Amendment No. 1.
    \15\ See BOX Rule 6090(c)(3).
    \16\ See Notice, supra note 3, at 6560.
    \17\ See id.
    \18\ Amendment No. 1 also modifies Exhibit 5 by striking from 
the proposed text of BOX Rule 6090(c)(7) an erroneous reference to 
BOX Rules 6090(c)(3) and (c)(4). See Amendment No. 1.
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    The Exchange states that its rules provide that index option 
contracts may expire at three-month intervals or in consecutive 
months.\19\ The Exchange proposes to list VOLS in six consecutive 
expiration months.\20\ In addition, long-term option series having up 
to 180 months to expiration \21\ and Short Term Option Series \22\ in 
VOLS may also be

[[Page 26968]]

listed and traded.\23\ VOLS will be quoted and traded in U.S. 
dollars.\24\
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    \19\ See Notice, supra, note 3, at 6560; BOX Rule 6090(a)(3).
    \20\ For example, the Exchange states that six monthly 
expirations from January through June may be listed. This is 
consistent with BOX Rule 6090(a)(3), which permits the Exchange to 
list up to six expiration months at any one time. See Notice, supra 
note 3, at 6560.
    \21\ See BOX Rule 6090(b)(1).
    \22\ See IM-6090-2 to BOX Rule 6090. The Exchange states that it 
may open Short Term Option Series for trading on any Thursday or 
Friday that is a business day and that expire on each of the next 
five Fridays that are business days and are not Fridays in which 
monthly options series or quarterly options series expire. See 
Notice, supra note 3, at 6561; see also IM-6090-2(a) to BOX Rule 
6090. The Exchange states that the interval between strike prices on 
Short Term Options Series may be $0.50 or greater where the strike 
price is less than $75, and $1 or greater where the strike price is 
between $75 and $150. During the month prior to expiration of an 
index option class that is selected for the Short Term Option Series 
Program, the strike price intervals for the related non-Short Term 
Option shall be the same as the strike price intervals for the Short 
Term Option. See Notice, supra note 3, at 6561; see also IM-6090-
2(b)(5) to BOX Rule 6090.
    \23\ See Notice, supra note 3, at 6559.
    \24\ See BOX Rule 6090(a)(1).
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    The Exchange believes that the Index is a broad-based index, as 
that term is defined in BOX Rule 6010(j).\25\ The Exchange proposes 
that there shall be no position or exercise limits for VOLS, and also 
proposes to apply margin requirements for the purchase and sale of VOLS 
that are identical to the margin requirements adopted by CBOE for 
options on the VIX.\26\
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    \25\ BOX Rule 6010(j) defines the term ``broad-based index'' as 
an index designed to be representative of a stock market as a whole 
or a range of companies in unrelated industries.
    \26\ The Exchange has proposed to amend BOX Rule 10120 (Margin 
Requirements) to make clear that the margin requirements for VOLS 
will be identical to those adopted by CBOE for options on the VIX. 
See CBOE Rule 12.3.
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    In addition, the Exchange proposes that the trading of options on 
the Index will be subject to the same rules that currently govern the 
trading of Exchange index options, including sales practice rules and 
trading rules.\27\ Trading of VOLS will also be subject to the trading 
halt procedures applicable to other index options traded on the 
Exchange.\28\ Further, Section 4000 of the Exchange's rules, which is 
designed to protect public customer trading, will apply to trading in 
VOLS.
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    \27\ See Notice, supra note 3, at 6561.
    \28\ Id. at 6560; see also BOX Rule 6080(c).
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    The Exchange believes that because the Index will settle using 
published quotes for SPY and there are currently no position limits for 
SPY options, it is appropriate not to impose position or exercise 
limits for VOLS. The Exchange notes that because the size of the market 
underlying SPY options is so large, it should dispel concerns regarding 
market manipulation. The Exchange believes that the same reasoning 
applies to VOLS since the value of VOLS is derived from the realized 
volatility of SPY. The Exchange also notes that VIX options are not 
subject to any position or exercise limits.\29\ The Exchange represents 
that it has an adequate surveillance program in place for the VOLS 
product and intends to apply to it the same program procedures that it 
applies to the Exchange's other options products.\30\ The Exchange 
states that its surveillance procedures will allow the Exchange to 
adequately surveil for any potential manipulation in the trading of 
VOLS. The Exchange states that, in its normal course of surveillance, 
it will monitor for any potential manipulation of the Index settlement 
value according to the Exchange's current procedures. In addition, the 
Exchange notes that it is a member of the Intermarket Surveillance 
Group, through which it can coordinate surveillance and investigative 
information sharing in the stock and options markets with all of the 
U.S. registered stock and options markets. The Exchange also represents 
that it has the necessary system capacity to support additional 
quotations and messages that will result from the listing and trading 
of VOLS.\31\
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    \29\ See Notice, supra note 3, at 6560-6561.
    \30\ See id. at 6561.
    \31\ Id.
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    The Exchange proposes that proposed rule change to list and trade 
VOLS be approved on a pilot basis for a period of twelve months. As 
part of the Pilot Program, the Exchange committed to submit a pilot 
program report to the Commission two months prior to the expiration 
date of the pilot program (the ``annual report'').\32\ The annual 
report would include an analysis of volume, open interest, and trading 
patterns. The analysis would examine trading in VOLS as well as trading 
in SPY. In addition, for series that exceed certain minimum open 
interest parameters, the annual report would provide an analysis of 
index price volatility and SPY trading activity. In addition to the 
annual report, the Exchange committed to provide the Commission with 
periodic interim reports while the pilot is in effect that would 
contain some, but not all, of the information contained in the annual 
report (``interim reports''). In its filing, BOX notes that it would 
provide the annual and interim reports to the Commission on a 
confidential basis.\33\
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    \32\ Id. at 6561-6562.
    \33\ Id. at 6562.
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III. Discussion and Commission Findings

    After careful consideration of the proposal, the Commission finds 
that the proposed rule change is consistent with the requirements of 
the Act and the rules and regulations thereunder applicable to a 
national securities exchange,\34\ and, in particular, the requirements 
of Section 6 of the Act.\35\ Specifically, the Commission finds that 
the proposed rule change is consistent with Section 6(b)(5) of the 
Act,\36\ 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. In particular, the 
Commission believes that the proposed VOLS options product provides 
investors with an additional trading and hedging mechanism. Further, as 
noted above, the Commission received one comment letter in support of 
the proposal and endorsed the usefulness of the VOLS products for these 
purposes. The comment letter stated, ``[t]hese options will be 
extremely helpful for hedging index option exposure, equity portfolios, 
and as a risk-management tool for hedge fund managers.'' \37\ In 
addition, the Commission believes that the proposal will allow BOX to 
conduct a limited and carefully monitored pilot for the listing and 
trading of VOLS, as proposed.
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    \34\ 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).
    \35\ 15 U.S.C. 78f.
    \36\ 15 U.S.C. 78f(b)(5).
    \37\ See O'Connell Letter, supra note 7, at 1.
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    The Commission believes that the Exchange's proposal to impose no 
position or exercise limits on VOLS is appropriate and consistent with 
the Act. The Commission also believes that the proposed strike price 
intervals are consistent with the Act. $0.50 or greater strikes for 
VOLS where the strike price is less than $75, $1 or greater strike 
price intervals for VOLS where the strike price is $200 or less, and $5 
or greater strike price intervals for VOLS when the strike price is 
greater than $200 should provide investors with added flexibility in 
the trading of VOLS options and will further the public interest by 
allowing investors to establish positions that are better tailored to 
meet their investment objectives. Moreover, the Commission notes that, 
under the Exchange's rules, the strike prices of new or additional 
series of VOLs shall be reasonably related to--i.e., within 30% of--the 
current value of the underlying index at the time such series are first 
opened for trading.\38\ The Commission also notes that the Exchange has 
represented that it has the necessary system capacity to

[[Page 26969]]

handle the additional quotations and messages associated with the 
listing and trading of VOLS.\39\
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    \38\ See BOX Rule 6090(c)(3) and (c)(4).
    \39\ See Notice, supra note 3, at 6561.
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    The Commission also believes that it is consistent with the Act to 
apply margin requirements to the proposed VOLS product that are 
identical to the margin requirements adopted by the CBOE for options on 
the VIX. The Exchange has represented that BOX options participants and 
their associated persons are bound by the initial and maintenance 
margin requirements of either the CBOE or the New York Stock Exchange, 
pursuant to BOX Rule 10120.\40\ As the CBOE VIX measures the expected 
volatility of the S&P 500 Index, the Commission believes it is 
acceptable to apply the same margin requirements applying to VIX 
options to VOLS, which are options on an index measuring the realized 
volatility of SPY. The Commission further believes that the Exchange's 
proposed minimum trading increment, series openings, and other aspects 
of the proposed rule change are appropriate and consistent with the 
Act.
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    \40\ Id. at 6560.
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    In the Commission's order approving the listing and trading of 
P.M.-settled options on the S&P 500 Index on CBOE,\41\ the Commission 
noted that the potential impact on the market at expiration for the 
underlying component stocks for a P.M.-settled, cash-settled index 
option remained unclear, given past experience with the impact of P.M. 
settlement of cash-settled index derivatives on the underlying cash 
markets and the enhanced closing procedures that are now in use at the 
primary equity markets.\42\ To assist the Commission in assessing any 
potential impact of a P.M.-settled VOLS product on the options markets 
as well as the underlying cash equities markets, BOX will be required 
to submit data to the Commission as a condition of Commission approval 
of the VOLS product on a pilot basis. The Commission believes that 
BOX's proposed twelve-month pilot, together with the data and analysis 
that BOX should provide to the Commission, should allow BOX and the 
Commission to monitor for and assess any potential for adverse market 
effects. Specifically, the data and analysis should assist the 
Commission in evaluating the effect of allowing P.M. settlement for 
VOLS on SPY.
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    \41\ See Securities Exchange Act Release No. 68888 (February 8, 
2013), 78 FR 10668 (February 14, 2013).
    \42\ Id. at 10669.
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    BOX's proposed twelve-month pilot will enable the Commission to 
collect current data to assess and monitor for any potential for impact 
on the markets. In particular, the data collected from BOX's Pilot 
Program will help inform the Commission's consideration of whether the 
pilot should be modified, discontinued, extended, or permanently 
approved. The Pilot Program information should help the Commission 
assess the impact on the markets and determine whether other changes 
are necessary. Furthermore, the Exchange's ongoing analysis of the 
pilot should help it monitor any potential risks from large P.M.-
settled positions and take appropriate action on a timely basis if 
warranted.
    As a national securities exchange, the Exchange is required, under 
Section 6(b)(1) of the Act,\43\ to enforce compliance by its members 
and persons associated with its members with the provisions of the Act, 
Commission rules and regulations thereunder, and its own rules. In this 
regard, the Commission notes that trading of VOLS will be subject to 
the same rules that currently govern the trading of other index options 
on the Exchange.\44\ In addition, as noted above, the Exchange has 
asserted that the Index settlement value is not susceptible to 
manipulation.\45\ Moreover, the Exchange has represented that it has an 
adequate surveillance program in place for options traded on the Index, 
and will monitor for any potential manipulation of the Index settlement 
value according to its current surveillance procedures.\46\ In 
approving the proposed listing and trading of the Index options, the 
Commission has also relied on BOX's representation that it has the 
necessary system capacity to support the new options series that will 
result from this proposal.\47\
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    \43\ 15 U.S.C. 78f(b)(1).
    \44\ See supra note 27 and accompanying text.
    \45\ See Notice, supra note 3, at 6561.
    \46\ Id.
    \47\ Id.
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    Accordingly, for the reasons stated above, the Commission finds 
good cause, pursuant to Section 19(b)(2) \48\ of the Act, for approving 
the Exchange's proposal, as modified by Amendment No. 1, prior to the 
30th day after the date of publication of the notice in the Federal 
Register.
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    \48\ 15 U.S.C. 78s(b)(2).
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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 (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-BOX-2015-06 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-BOX-2015-06. 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 will also 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-BOX-2015-06 and should be 
submitted on or before June 1, 2015.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\49\ that the proposed rule change (SR-BOX-2015-06), as modified by 
Amendment No. 1, be, and hereby is, approved on an accelerated basis 
for a twelve-month pilot period set to expire on May 6, 2016.
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    \49\ 15 U.S.C. 78s(b)(2).


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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\50\
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    \50\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2015-11275 Filed 5-8-15; 8:45 am]
 BILLING CODE 8011-01-P


