
[Federal Register Volume 82, Number 188 (Friday, September 29, 2017)]
[Notices]
[Pages 45650-45653]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-20889]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81714; File No. SR-CBOE-2017-062]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change To Permit the Exchange To Publish End-of-Day 
Indicative Values in SPX After the Close of Regular Trading Hours in 
SPX

September 25, 2017.
    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 September 18, 2017, Chicago Board Options Exchange, 
Incorporated (the ``Exchange'' or ``CBOE'') filed with the Securities 
and Exchange Commission (the ``Commission'') the proposed rule change 
as described in Items I and II 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

    The Exchange proposes to adopt a process for disseminating two-
sided indicative values in non-expiring series of S&P 500 Index 
(``SPX'') options, when necessary, in the interests of fair and orderly 
markets (``End-of-Day Indicative Values'').
    The text of the proposed rule change is also available on the 
Exchange's Web site (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), 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 Exchange proposes to amend Interpretation and Policy .06 to 
Rule 6.2B (Hybrid Opening (and Sometimes Closing) System (``HOSS'')) to 
establish its aftermarket procedure for generating two-sided indicative 
values in certain series of SPX options (including series of SPX and 
SPXW). Specifically, proposed paragraph (a) would contain the current 
text of Interpretation and Policy .06 to Rule 6.2B, which the Exchange 
is not proposing to change, regarding the Exchange's end-of-month 
process for disseminating after the close of trading bid and offer 
quotations that reflect a designated Lead Market-Maker's (``LMM's'') 
calculated theoretical fair value of non-expiring series of SPX options 
as of time of the close of trading in the underlying cash market on the 
last business day of each calendar month. Proposed paragraph (b) of 
Interpretation and Policy .06 to Rule 6.2B would establish the 
Exchange's process for generating two-sided indicative values for non-
expiring series of SPX options when the Exchange determines that it is 
necessary to publish such values in the interests of fair and orderly 
markets on trading days other than the final business day of a calendar 
month. The specific provisions of proposed paragraph (b) to 
Interpretation and Policy .06 to Rule 6.2B are discussed in detail 
below.
Background
    The Exchange's opening and closing procedures are codified in Rules 
6.2 (Trading Rotations), 6.2B (Hybrid Opening System (``HOSS'')), and 
24.13 (Trading Rotations).\5\ In addition to describing the Exchange's 
normal opening and closing procedures, the Rules also provide for 
deviations from the Exchange's regular opening and closing procedures, 
which, from time-to-time, the Exchange employs in the interests of fair 
and orderly markets under certain circumstances.\6\ Pursuant to Rules 
6.2, 6.2A, 6.2B and 24.13, the Exchange may, in the interests of a fair 
and orderly market, decide to employ special closing procedures after 
the normal close of a trading session.\7\ For example, Interpretation 
and Policy .02 to Rule 6.2 provides that a closing trading rotation may 
be conducted in non-expiring options whenever two Floor Officials 
conclude, in their judgment, that such action is

[[Page 45651]]

appropriate. Among the factors that may be considered in determining 
whether to conduct a closing rotation are whether there has been a 
recent opening or reopening of trading in the underlying security, a 
declaration of a ``fast market'' pursuant to Rule 6.6,\8\ a need for a 
rotation in connection with expiring individual security options, an 
end of the year rotation, or the restart of a rotation which is already 
in progress.\9\ Notably, Interpretation and Policy .02 to Rule 6.2 
explicitly provides that the list of examples identified as factors 
that may be considered in determining whether to employ a closing 
rotation are exemplary, not exhaustive. In addition, Rule 6.2 expressly 
provides that the DPM or LMM appointed in the class may, with the 
approval of senior Help Desk personnel, deviate from any rotation 
policy or procedure issued by the Exchange. Such deviations from normal 
policies and procedures may include, for example, determinations to 
employ abbreviated closing rotation procedures pursuant to 
Interpretation and Policy .04 to Rule 6.2.
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    \5\ Additional opening procedures for classes that are not 
traded on the Hybrid Trading System are also contained in Rule 6.2A 
(Rapid Opening System). The ``Hybrid Trading System'' refers to the 
Exchange's trading platform that allows Market-Makers to submit 
electronic quotes in their appointed classes and any connectivity to 
the foregoing trading platform that is administered by or on behalf 
of the Exchange, such as a communications hub. ``Hybrid 3.0 
Platform'' is an electronic trading platform on the Hybrid Trading 
System that allows one or more quoters to submit electronic quotes 
which represent the aggregate Market-Maker quoting interest in a 
series for the trading crowd. References to ``Hybrid,'' ``Hybrid 
System,'' or ``Hybrid Trading System'' in the Exchange's Rules 
include all platforms unless otherwise provided by rule, including 
both the Hybrid and Hybrid 3.0 platforms. See Rule 1.1(aaa) 
(Definitions--Hybrid Trading System). Currently, all classes traded 
on the Exchange are traded on the Hybrid System as defined under 
Rule 1.1(aaa), with standard SPX options contracts being the only 
group of series of any class that is traded on the Hybrid 3.0 
Platform.
    \6\ Although Rule 6.2 pertains to trading rotations, 
Interpretation and Policy .02 to Rule 6.2 provides that the 
Designated Primary Market-Maker (``DPM'') or LMM appointed in the 
class may deviate from any rotation policy or procedure issued by 
the Exchange with the approval of two Floor Officials. Rule 6.2B(h) 
is silent as to the type of closing procedure that may be employed 
in the interests of a fair and orderly market. Rule 24.13 references 
Rules 6.2 and 6.2B, indicating that the procedures set forth in 
those rules may be employed with respect to index options.
    \7\ See Rules 6.2.02, 6.2.03, 6.2.05, 6.2B(h), 6.2B(f), and 
24.13.01.
    \8\ See Rule 6.6(a) (Unusual Market Conditions) (Whenever in the 
judgment of any two Floor Officials, because of an influx of orders 
or other unusual conditions or circumstances, the interest of 
maintaining a fair and orderly market so require, those Floor 
Officials may declare the market in one or more classes of option 
contracts to be ``fast.'').
    \9\ See Rule 6.2.02.
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    Similarly, Rule 6.2B(g) permits the Exchange to employ a closing 
rotation in series traded on the Hybrid Trading System. Under Rule 
6.2B(h), the Exchange may decide to employ a closing rotation in a 
series after the end of the normal close of any trading session 
whenever the Exchange concludes that such action is appropriate in the 
interests of a fair and orderly market. Similar to Interpretation and 
Policy .02 to Rule 6.2, the list of factors that may be considered in 
determining whether to hold a closing rotation procedure include, but 
are not limited to, whether there has been a recent opening or 
reopening of trading in the underlying security, a declaration of a 
fast market, or a need for a closing procedure in connection with 
expiring individual security options, an end of the year procedure, or 
the restart of a procedure which is already in progress. Rule 6.2B(g) 
provides that senior Help Desk personnel and senior management may 
deviate from the standard manner of conducting a closing rotation in 
any option class if necessary in the interests of maintaining a fair 
and orderly market. Similarly, Rule 24.13 extends the closing rotation 
procedures in Rules 6.2 and 6.2B to index options products.\10\
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    \10\ Under Rule 24.13 (Trading Rotations), the Exchange may 
provide for the opening rotation to be conducted using the 
procedures as described in this Rule 24.13 or in Rule 6.2, or by use 
of the Exchange's Rapid Opening System as set forth in Rule 6.2A or 
the Exchange's Hybrid Opening System as set forth in Rule 6.2B. The 
DPM, LMM or Order Book Official (``OBO''), with the approval of two 
Floor Officials, may deviate from any rotation policy or procedure 
issued by the Exchange when they conclude in their judgment that 
such action is appropriate in the interests of a fair and orderly 
market.
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    In general, the Exchange's end-of-day bid and offer quotations are 
determined based on actual bids and offers displayed in market as of 
the close of trading on the Exchange. These final end-of-day bids and 
offer are used by various market participants, which may include 
broker-dealers, mutual funds, hedge funds, advisory firms, and clearing 
houses, for different business and risk-related functions such as 
portfolio performance analyses, daily profit and loss reports. On 
certain trading days, however, market conditions may cause Market-
Makers to widen or remove their quotes from the market during the final 
moments of trading in order to mitigate the risk and uncertainty 
associated with carrying overnight positions and the possibility of 
hedges being unavailable to offset such risk after the close of 
trading. Additionally, synchronization issues may cause Market-Makers 
to widen or remove their quotes from the market during the final 
moments of trading if their feed from the underlying futures markets 
are not synchronized with the Exchange's close of trading. In these 
instances, resulting quotations may not reflect true market pricing, 
which may artificially affect the Net Asset Value (``NAV'') of mutual 
funds, portfolio managers' performance indicators, and institutional 
and retail capital requirements. Consistent with the discretion 
afforded to the Exchange under Rules 6.2A, 6.2B, and 24.13, as 
discussed above, the Exchange may conduct special closing procedures to 
ensure that the end-of-day pricing is consistent with actual market 
conditions as of the close of trading if it concludes that deviation 
from the Exchange's standard closing procedures is appropriate in the 
interests of fair and orderly markets. In such cases, in addition to 
publishing the actual end-of-day bid and offer quotations displayed in 
market as of the close of trading, the Exchange provides notice to 
Trading Permit Holders (``TPHs'') that a second set of quotations, 
determined based on an objectively selected Market-Maker's 
algorithmically generated bid and offer quotations in affected series, 
will be disseminated after the close of trading pursuant to special 
closing procedures. In an effort to enhance and increase transparency 
around the end-of-day process, the Exchange proposes to change the way 
that it deals with wide and absent quotations in non-expiring series of 
SPX on days other than the final business day of each calendar month by 
adding to the Rules a procedure for disseminating clearly marked two-
sided indicative values, derived from previously displayed firm 
quotations and orders or generally accepted volatility and options 
pricing models after the close of trading.
Proposal
    The Exchange proposes to adopt paragraph (b) to Interpretation and 
Policy .06 to Rule 6.2B to describe its end-of-day process for 
formulating two-sided indicative values for certain series of SPX 
options when necessary in the interests of fair and orderly markets. 
Specifically, proposed paragraph (b) of Interpretation and Policy .06 
to Rule 6.2B would provide that following the close of trading on any 
trading day that is not the last business day of a calendar month, in 
addition to the Exchange's regular end-of-day quotations, the Exchange 
may determine, on a series-by-series basis, to disseminate two-sided 
indicative values in non-expiring series of SPX options in the 
interests of fair and orderly markets. Under the proposed rule, the 
determination to disseminate two-sided end-of-day indicative values 
would be made by the Exchange based on various sets of objective 
criteria such as the absence of any bid or offer in the series, whether 
the bid-ask differential in a series is unreasonably or extraordinarily 
wide in relation to the quote widths that existed in series during 
trading, or whether the midpoint between the quotes in the series moved 
by a certain amount within the final moments of trading.\11\
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    \11\ This process would not change the end-of-month fair value 
process, which is described in current Interpretation and Policy .06 
to Rule 6.2B and which would become paragraph (a) to Interpretation 
and Policy .06 to Rule 6.2B under the Exchange's proposal. In 
addition, the rule text would provide that the Exchange may 
determine, on a series-by-series basis, to disseminate two-sided 
indicative values in non-expiring series of SPX options only. This 
process would not be applicable to expiring series of SPX options as 
those series would be settled at the final cash market closing value 
(i.e. intrinsic value at expiration).
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    The Exchange would algorithmically derive such two-sided indicative 
values, on a series-by-series basis, based on the last displayed 
quotations and orders that meet an objective measure of reasonability 
(e.g., quotes and orders

[[Page 45652]]

that create a bid-ask differential that is not wider than a particular 
amount) prior to the close of trading. The Exchange notes that quotes 
and orders that meet the reasonability criteria typically exist within 
15 minutes of the close of trading. In the absence of quotes and orders 
in the series that meet the objective reasonability criteria, two-sided 
indicative values would be generated using generally accepted 
volatility and options pricing models (e.g., Black Scholes) as 
determined by the Exchange. The Exchange would apply the model to a set 
of data points (i.e. displayed quotations and orders) over a period of 
time prior to the close of trading to calculate implied volatility for 
all series within the data set and generate a volatility surface. 
Outlier data points (wide quotes or no bid series) would be removed 
from the calculation pursuant to a set of objective criteria. Using the 
derived volatility surface and ensuring that prices do not cross 
through closing bid/ask quotes (i.e., model-generated price cannot be 
lower than the market's highest bid price or greater than the lowest 
offer price), the Exchange would back out midpoint prices for all 
series and then generate two-sided indicative values around those 
midpoints, and the created spread would vary depending on series. Two-
sided indicative values would be disseminated via the Options Price 
Reporting Authority (``OPRA'') and CBOE Streaming Markets (``CSM''). 
Consistent with the last sentence of proposed Interpretation and Policy 
.06(b) to Rule 6.2B, which provides that two-sided indicative values 
would be clearly identified in an appropriate manner as determined by 
the Exchange, two-sided indicative values would be sent to OPRA with a 
specific message indicator (i.e. message type ``I'') that has been 
adopted by OPRA solely for the purpose of disseminating after-market 
indicative value information. Pursuant to OPRA message specifications, 
the new ``I'' message type would only be applicable to and active for 
messages sent after the close of trading of regular trading hours, 
which would be enforced to only allow ``I'' messages to be disseminated 
after 4:15 p.m. ET. The ``I'' indicator will not be disseminated for 
quotes generated during an extended trading hours session. The Exchange 
has communicated and worked with other OPRA reporting entities to 
ensure that within the industry, the transmission of aftermarket 
messages types marked ``I'' is defined within the OPRA message 
specifications and understood to be used to delineate informational 
two-sided indicative values. Pursuant to the proposed rule text, these 
OPRA message specifications and the ``I'' indicator would be further 
described and communicated to market participants via Regulatory 
Circular.
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.\12\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \13\ 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) \14\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
    \14\ Id.
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    In particular, the Exchange believes that generating end-of-day 
indicative values will serve to protect investors and the public 
interest by giving market participants another value to reference, if, 
for example, market participants believe the end-of-day indicative 
values are more accurate than the actual end-of-day values. The 
Exchange believes that the proposed procedure is a reasonable procedure 
permitting the Exchange to disseminate informational indicative values 
more reflective of actual options values in addition to final end-of-
day displayed quotations when members' systems issues or market 
conditions result in an absence of final quotes or extraordinarily wide 
final quotes without interfering in the markets or impeding any market 
functionalities that rely on accurate pricing or end-of-day quotes. The 
Exchange believes that such procedures may be especially appropriate 
given the fact that wide or no-bid closing prices may be a reflection 
of prudent risk control measures, which may cause market participants 
to widen or pull quotations from the market prior to the close of 
trading in order to avoid carrying overnight positions or taking on 
positions while appropriate hedging instruments are unavailable. The 
Exchange also believes that its proposal is consistent with the 
Commission's recent emphasis on the need for exchanges to adopt 
measures to protect investors by dampening the effects of 
unrepresentative market volatility on market participants.\15\
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    \15\ The Exchange also notes the Commission's emphasis on the 
need for exchanges to adopt measures to dampen and protect against 
excessive risk and market volatility. See, e.g., 15 U.S.C. 240.15c3-
5 (Risk Management Controls for Brokers or Dealers with Market 
Access); Securities Exchange Act Release No. 34-67091 (May 31, 
2011), (Order Approving, on a Pilot Basis, the National Market 
System Plan to Address Extraordinary Market Volatility), File No. 4-
631. Various exchanges have also instituted precautionary systematic 
controls to assist market participants in limiting exposure and 
ensuring against excessive risk-taking. See, e.g., Nasdaq ISE, LLC 
Rule 804(g) (Automated Quotation Adjustments); Nasdaq Stock Market 
LLC Rule 6130 (NASDAQ Kill Switch); see also Rule 8.18 (Quote Risk 
Monitor Mechanism).
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    Additionally, the Exchange believes that the proposed rule change, 
which simply proposes to make additional information regarding the 
indicative market value(s) of select SPX options available to market 
participants after the close of the markets is consistent with its 
trading rules and the Act. The proposed rule does not seek to modify 
any rules relating to or impacting the way in which options 
transactions are handled, represented, executed, or reported on the 
Exchange. Rather, the Exchange is simply proposing to make additional 
information available to market participants under certain 
circumstances in which such information may be informative or useful. 
This information would not be disseminated during trading hours and 
would be clearly marked to denote that it is informational only. The 
Exchange also believes that its proposal is consistent with current 
Rules 6.2, 6.2A, 6.2B and 24.13, which provide that the Exchange may, 
in the interests of a fair and orderly market, decide to employ the 
end-of-day indicative value process after the normal close of a trading 
session.

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. The proposed rule change 
merely seeks to describe procedures that may be employed at the 
Exchange. The proposed procedures will be equally applied to affect all 
market participants

[[Page 45653]]

equally in the options market. Furthermore, when the Exchange employs 
the end-of-day indicative value process, market participants determine 
whether to utilize the indicative value.

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 written 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: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
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)(iii) of the Act \16\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\17\
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    \16\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \17\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and text of the proposed rule change, at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    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: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or 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-CBOE-2017-062 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-CBOE-2017-062. 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-CBOE-2017-062, and should be 
submitted on or before October 20, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-20889 Filed 9-28-17; 8:45 am]
 BILLING CODE 8011-01-P


