[Federal Register Volume 83, Number 70 (Wednesday, April 11, 2018)]
[Notices]
[Pages 15655-15658]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-07408]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83002; File No. SR-ISE-2018-27]


Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Modify the 
Rebates Provided to Members That Send Unsolicited Crossing Orders to 
the Exchange

April 5, 2018.
    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 March 23, 2018, Nasdaq ISE, LLC (``ISE'' or ``Exchange'') filed with 
the Securities and Exchange Commission (``Commission'') the proposed 
rule change as described in Items I and II below, which Items have been 
prepared by the Exchange. 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 the Exchange's Schedule of Fees to 
modify the rebates it provides to Members that send unsolicited 
Crossing Orders \3\ to the Exchange.
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    \3\ A ``Crossing Order'' is an order executed in the Exchange's 
Facilitation Mechanism, Solicited Order Mechanism, Price Improvement 
Mechanism (``PIM'') or submitted as a Qualified Contingent Cross 
(``QCC'') order. For purposes of this Fee Schedule, orders executed 
in the Block Order Mechanism are also considered Crossing Orders. 
See Preface to ISE's Schedule of Fees.
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    The text of the proposed rule change is available on the Exchange's 
website at http://ise.cchwallstreet.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 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 amend ISE's Schedule 
of Fees to replace the current Member Order Routing Program (``MORP''), 
which provides enhanced rebates to order routing firms that select the 
Exchange as the default routing destination for unsolicited Crossing 
Orders, and the Customer to Customer Rebate PLUS program,\4\ which 
provides an indirect incentive for Members to direct unsolicited 
Crossing Orders to the Exchange, with a new rebate program, entitled 
the ``PIM and Facilitation Rebate'' program. Through this new program, 
the Exchange aims to provide a more accessible, direct, and effective 
incentive to Members to direct their unsolicited Crossing Orders to the 
Exchange.
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    \4\ See Section IV, A of the Schedule of Fees.
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MORP
    As noted above, the MORP is a program that provides rebates to 
firms that select the Exchange as their default routing destination for 
unsolicited Crossing Orders. To be eligible to participate in MORP, an 
Electronic Access Member (``EAM'') must: (1) Designate to the Exchange, 
in writing, those sessions (connections to the Exchange over which the 
firm submits orders) that meet the following MORP criteria; (2) provide 
systems to its clients that enable the electronic routing of option 
orders to all of the U.S. options exchanges, including ISE; (3) 
interface with ISE to access the Exchange's electronic options trading 
platform; (4) offer to its clients a customized interface and routing 
functionality such that ISE will be the default destination for all 
unsolicited Crossing Orders entered by the EAM, provided that market 
conditions allow the Crossing Order to be executed on ISE; (5) 
configure its own option order routing functionality such that ISE will 
be the default destination for all unsolicited Crossing Orders, 
provided that market conditions

[[Page 15656]]

allow the Crossing Order to be executed on ISE, with respect to all 
option orders as to which the EAM has routing discretion; and (6) 
ensure that the default routing functionality permits users submitting 
option orders through such system to manually override the ISE as the 
default destination on an order-by-order basis. EAMs that wish to 
participate in the program must certify that they meet the foregoing 
MORP requirements, in writing, on a monthly basis.
    An EAM that is MORP-eligible currently receives a rebate for all 
unsolicited Crossing Orders of $0.05 per originating contract side, 
provided that the Member executes a minimum average daily volume 
(``ADV'') in unsolicited Crossing Orders of at least 30,000 originating 
contract sides. This rebate increases to $0.07 per originating contract 
side, provided that the Member executes a higher ADV in unsolicited 
Crossing Orders of 100,000 originating contract sides. The rebate for 
the highest tier achieved is applied retroactively to all eligible 
contracts traded in a given month.
    In addition, any EAM that qualifies for the MORP rebate by 
executing an ADV of 30,000 originating contract sides or more is also 
eligible for increased Facilitation and Solicitation break-up rebates 
\5\ for their Non-ISE Market Maker,\6\ Firm Proprietary,\7\ Broker-
Dealer,\8\ Professional Customer,\9\ and Priority Customer orders.\10\ 
Currently, MORP eligible members that execute a qualifying ADV in 
unsolicited Crossing Orders of at least 30,000 originating contract 
sides, receive a Facilitation and Solicitation break-up rebate that is 
$0.35 per contract for regular and complex orders in Select 
Symbols,\11\ $0.15 per contract for regular orders in Non-Select 
Symbols,\12\ $0.80 per contract for complex orders in Non-Select 
Symbols, and $0.15 per contract for regular and complex orders in 
foreign exchange option classes.
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    \5\ Break-up rebates are provided for contracts that are 
submitted to the Facilitation and Solicited Order Mechanisms that do 
not trade with their contra order except when those contracts trade 
against pre-existing orders and quotes on the Exchange's orderbooks. 
The applicable fee for Crossing Orders is applied to any contracts 
for which a rebate is provided.
    \6\ A ``Non-ISE Market Maker'' is a market maker as defined in 
Section 3(a)(38) of the Securities Exchange Act of 1934, as amended, 
registered in the same options class on another options exchange.
    \7\ A ``Firm Proprietary'' order is an order submitted by a 
member for its own proprietary account.
    \8\ A ``Broker-Dealer'' order is an order submitted by a member 
for a broker-dealer account that is not its own proprietary account.
    \9\ A ``Professional Customer'' is a person or entity that is 
not a broker/dealer and is not a Priority Customer.
    \10\ A ``Priority Customer'' is a person or entity that is not a 
broker/dealer in securities, and does not place more than 390 orders 
in listed options per day on average during a calendar month for its 
own beneficial account(s), as defined in ISE Rule 100(a)(37A).
    \11\ ``Select Symbols'' are options overlying all symbols listed 
on the ISE that are in the Penny Pilot Program.
    \12\ ``Non-Select Symbols'' are options overlying all symbols 
excluding Select Symbols.
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    The MORP program was designed to encourage order routing firms to 
execute additional unsolicited Crossing Order volume on the ISE. 
However, the Exchange has concluded that the MORP program has not 
fulfilled its intended purpose due, in large part, to the fact that the 
conditions for participation in the program have proven to be onerous. 
Accordingly, the Exchange proposes to eliminate the MORP program and, 
as discussed below, the Exchange proposes to replace it with the 
proposed PIM and Facilitation Rebate program, described below.
Customer to Customer Rebate PLUS
    As part of the QCC and Solicitation Rebate program, the Exchange 
presently offers a set of rebates called ``Customer to Customer'' 
Rebate PLUS.\13\ These rebates apply to ``Customer to Customer'' Orders 
\14\ and in particular, those executed by two Priority Customers with: 
(1) A specified volume of QCC \15\ and other solicited Crossing Orders 
in a given month; and (2) 175,000 or more unsolicited originating 
Facilitation \16\ contract sides per month. Once a Member meets the 
volume thresholds described above, the Member receives $0.05 per 
contract ``Customer to Customer'' Rebate PLUS for each originating 
contract side of their ``Customer to Customer'' Orders.
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    \13\ See Section IV, A of the Schedule of Fees.
    \14\ A ``Customer to Customer'' order is a QCC or other 
solicited order between two Priority Customers.
    \15\ A QCC Order is comprised of an originating order to buy or 
sell at least 1000 contracts that is identified as being part of a 
qualified contingent trade, as that term is defined in Supplementary 
Material .01 below, coupled with a contra-side order or orders 
totaling an equal number of contracts. See ISE Rule 715(j).
    \16\ The Facilitation Mechanism is a process by which an EAM can 
execute a transaction wherein the EAM seeks to facilitate a block-
size order it represents as agent, and/or a transaction wherein the 
EAM solicited interest to execute against a block-size order it 
represents as agent. See Rule 716(d).
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    As a means of consolidating its incentive programs relating to 
unsolicited Crossing orders, and to provide more direct incentives to 
encourage such orders, the Exchange proposes to eliminate the Customer 
to Customer Rebate PLUS program and replace it with the proposed PIM 
and Facilitation Rebate, described below.
PIM and Facilitation Rebate
    In lieu of the MORP and the Customer to Customer Rebate PLUS 
program, the Exchange proposes to incentivize the flow of unsolicited 
Crossing Orders to the Exchange by establishing a PIM and Facilitation 
Rebate program. This proposed program would offer rebates to Members 
that use the Facilitation Mechanism or PIM for unsolicited Crossing 
Orders whereby the contra-side of those orders: (1) Is either Firm 
Proprietary or Broker-Dealer; and (2) has total affiliated ADV \17\ of 
250,000 or more contracts. Members whose orders meet these conditions 
will be entitled to receive a rebate of $0.02 per originating contract 
for up to 199,999 originating contract sides in a month. To the extent 
that Members have at least 200,000 originating contract sides in a 
given month, then the Members will be entitled to receive a rebate of 
$0.03 for all of its originating contract sides in that month that 
qualify for the PIM and Facilitation Rebate Program during that month, 
including the Members' first qualifying 199,999 originating contract 
sides.
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    \17\ Eligible volume from affiliated Members will be aggregated 
in determining total affiliated ADV, provided there is at least 75% 
common ownership between the Members as reflected on each Member's 
Form BD, Schedule A.
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    To the extent that Members qualify for the foregoing rebate, they 
may also become eligible for two additional rebates on the originating 
contract sides of their unsolicited Crossing Orders. First, if Members 
separately achieve, on a cumulative basis, more than 1,000,000 QCC and 
Solicitation Order Mechanism \18\ originating contracts sides in a 
month, then they will earn an additional $0.01 rebate per originating 
contract side. Second, if Members achieve Priority Customer Complex ADV 
of between 100,000-224,999 contracts, then they will earn an additional 
$0.01 rebate per originating contract side on their unsolicited 
Crossing Orders that qualify for the PIM and Facilitation Rebate 
program. This second additional rebate will be $0.02 to the extent that 
Members achieve Priority Customer Complex ADV Orders of 225,000 
contracts or more. For avoidance of doubt, if a Member has 200,000 
originating contract sides in a month that qualify for a $0.03 rebate 
under the PIM and Facilitation Rebate

[[Page 15657]]

program and the Member also achieves Priority Customer Complex Order 
ADV of 225,000 contracts in that same month, then the Member will 
receive an additional $0.02 rebate on all of its 200,000 originating 
contract sides that qualify for the PIM and Facilitation Rebate 
program, for a total rebate on such originating contract sides of 
$0.05. These two additional rebate opportunities will be cumulative, 
meaning that a Member can qualify for both of them and receive an 
additional rebate of up to $0.03 per originating contract side.
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    \18\ The Solicited Order Mechanism is a process by which an EAM 
can attempt to execute orders of 500 or more contracts it represents 
as agent against contra orders that it solicited. Each order entered 
into the Solicited Order Mechanism shall be designated as all-or-
none. See ISE Rule 716(e).
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    The combination of the base rebate and the additional rebates will 
offer Members that use the Facilitation Mechanism or PIM for 
unsolicited Crossing Orders an opportunity to receive as much as $0.06 
in rebates per originating contract side.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\19\ in general, and furthers the objectives of 
Sections 6(b)(4) and 6(b)(5) of the Act,\20\ in particular, in that it 
provides for the equitable allocation of reasonable dues, fees, and 
other charges among members and issuers and other persons using any 
facility, and is not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \19\ 15 U.S.C. 78f(b).
    \20\ 15 U.S.C. 78f(b)(4) and (5).
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    The Commission and the courts have repeatedly expressed their 
preference for competition over regulatory intervention in determining 
prices, products, and services in the securities markets. In Regulation 
NMS, while adopting a series of steps to improve the current market 
model, the Commission highlighted the importance of market forces in 
determining prices and SRO revenues and, also, recognized that current 
regulation of the market system ``has been remarkably successful in 
promoting market competition in its broader forms that are most 
important to investors and listed companies.'' \21\
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    \21\ Securities Exchange Act Release No. 51808 (June 9, 2005), 
70 FR 37496, 37499 (June 29, 2005) (``Regulation NMS Adopting 
Release'').
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    Likewise, in NetCoalition v. Securities and Exchange Commission 
\22\ (``NetCoalition'') the DC Circuit upheld the Commission's use of a 
market-based approach in evaluating the fairness of market data fees 
against a challenge claiming that Congress mandated a cost-based 
approach.\23\ As the court emphasized, the Commission ``intended in 
Regulation NMS that `market forces, rather than regulatory 
requirements' play a role in determining the market data . . . to be 
made available to investors and at what cost.'' \24\
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    \22\ NetCoalition v. SEC, 615 F.3d 525 (DC Cir. 2010).
    \23\ See NetCoalition, at 534-535.
    \24\ Id. at 537.
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    Further, ``[n]o one disputes that competition for order flow is 
`fierce.' . . . As the SEC explained, `[i]n the U.S. national market 
system, buyers and sellers of securities, and the broker-dealers that 
act as their order-routing agents, have a wide range of choices of 
where to route orders for execution'; [and] `no exchange can afford to 
take its market share percentages for granted' because `no exchange 
possesses a monopoly, regulatory or otherwise, in the execution of 
order flow from broker dealers'. . ..'' \25\ Although the court and the 
SEC were discussing the cash equities markets, the Exchange believes 
that these views apply with equal force to the options markets.
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    \25\ Id. at 539 (quoting Securities Exchange Act Release No. 
59039 (December 2, 2008), 73 FR 74770, 74782-83 (December 9, 2008) 
(SR-NYSEArca-2006-21)).
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    The Exchange believes that its proposal to eliminate the MORP is 
reasonable because the MORP has proven to be ineffective in achieving 
its aim of attracting additional unsolicited Crossing Order flow to the 
Exchange. The conditions for participation in the MORP have proven to 
be too onerous for Members. Furthermore, the Exchange has limited 
resources available to it to devote to the operation of special pricing 
programs and as such, it is equitable to allocate those resources to 
those programs that are effective and away from those programs that are 
ineffective. The proposal to eliminate the MORP is not unfairly 
discriminatory because the proposal will apply uniformly to all 
similarly situated Members.
    The Exchange's proposal to eliminate the Customer to Customer 
Rebate PLUS program is also both reasonable and equitable because this 
program provides only an indirect incentive to Members to send 
unsolicited Crossing Orders to the Exchange and the Exchange prefers to 
re-allocate its limited resources to the provision of a stronger and 
more direct incentive. The proposal to eliminate the Customer to 
Customer Rebate PLUS program is not unfairly discriminatory because the 
proposal will apply uniformly to all similarly situated Members.
    The Exchange's proposal to replace the MORP and the Customer to 
Customer Rebate PLUS program with the PIM and Facilitation Rebate 
program is also reasonable and equitable. The Exchange expects the PIM 
and Facilitation program will complement its QCC and Solicitation 
Rebate program for solicited Crossing Orders and it will provide a more 
easily accessible, direct, and effective incentive for Members to send 
their unsolicited Crossing Orders to the Exchange. In particular, the 
proposal will encourage Members to send unsolicited PIM and 
Facilitation orders to the Exchange and to meet the 200,000 contract 
threshold to obtain the higher $0.03 base rebate.\26\ The Exchange also 
believes that it reasonable and equitable to provide an additional 
rebate as a reward to Members that achieve high levels of QCC and 
Solicitation activity in addition to Facilitation and PIM activity. It 
is also reasonable and equitable for the Exchange to provide additional 
rebates to Members that achieve high volumes of Priority Customer 
complex activity as a means of incentivizing increased use of the 
Exchange's Complex Order Book. The Exchange expects that this package 
of rebates will be attractive to market participants.
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    \26\ The Exchange believes it is reasonable to determine rebates 
with reference to ``total affiliated ADV'' because it applies the 
same concept elsewhere, including in calculating its QCC and 
Solicitation Rebate program rebates.
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    Finally, the Exchange believes that the proposed rebates for 
unsolicited Crossing Orders in the PIM and Facilitation Mechanism are 
not unfairly discriminatory. Although the proposal is focused on 
incentives for unsolicited Crossing Orders, it replaces existing 
Exchange rebate programs with a similar aim. In any event, the Exchange 
already maintains a robust QCC and Solicitation Rebate program of 
incentives for members that submit solicited Crossing Orders to the QCC 
or the Solicitation, Facilitation, or Price Improvement Mechanisms. 
Furthermore, the Exchange's decision to limit program eligibility to 
those unsolicited Crossing Orders that involve Firm Proprietary or 
Broker Dealer contra-side parties is not unfairly discriminatory 
because the Exchange wishes to encourage the direct submission by 
Members of Crossing Orders to the Exchange, and as a matter of 
practice, Firm Proprietary and Broker-Dealer orders are most likely to 
directly submitted by Members as these participant types typically 
utilize the crossing fee cap on ISE and have increased incentive to 
pre-pay for their Crossing Orders. Finally, the Exchange will apply the 
proposed rebates uniformly to all Members' orders that meet the 
required volume thresholds.

[[Page 15658]]

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 not necessary or appropriate in 
furtherance of the purposes of the Act.
    The proposed changes to the Exchange's rebate programs are intended 
to attract additional order flow to ISE. The Exchange believes that the 
proposal will enhance the competiveness of the ISE relative to other 
options exchanges.
    The Exchange notes that it operates in a highly competitive market 
in which market participants can readily favor competing venues if they 
deem fee levels at a particular venue to be excessive, or rebate 
opportunities available at other venues to be more favorable. In such 
an environment, the Exchange must continually adjust its fees to remain 
competitive with other exchanges and with alternative trading systems 
that have been exempted from compliance with the statutory standards 
applicable to exchanges. Because competitors are free to modify their 
own fees in response, and because market participants may readily 
adjust their order routing practices, the Exchange believes that the 
degree to which fee changes in this market may impose any burden on 
competition is extremely limited.
    In sum, if the changes proposed herein are unattractive to market 
participants, it is likely that the Exchange will lose market share as 
a result. Accordingly, the Exchange does not believe that the proposed 
changes will impair the ability of Members or competing order execution 
venues to maintain their competitive standing in the financial markets.

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

    No written comments were either solicited or received.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act,\27\ and Rule 19b-4(f)(2) \28\ 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: (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.
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    \27\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \28\ 17 CFR 240.19b-4(f)(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 [email protected]. Please include 
File Number SR-ISE-2018-27 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-ISE-2018-27. 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 (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 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 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-ISE-2018-27 and should be submitted on 
or before May 2, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\29\
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    \29\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-07408 Filed 4-10-18; 8:45 am]
BILLING CODE 8011-01-P


