[Federal Register Volume 85, Number 23 (Tuesday, February 4, 2020)]
[Notices]
[Pages 6246-6252]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-02049]



[[Page 6246]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88076; File No. SR-CboeBZX-2020-012]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change Relating 
To Amend the Exchange's Opening Process To Allow for an Opening 
Auction, Similar to that Available on Cboe Exchange, Inc. (``Cboe 
Options'') and Cboe EDGX Exchange, Inc. (``EDGX Options''), and Make 
Other Conforming Changes to Rules 16.1 and 21.17

January 29, 2020.
    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 January 22, 2020, Cboe BZX Exchange, Inc. (``BZX'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``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

    Cboe BZX Exchange, Inc. (the ``Exchange'' or ``BZX'') proposes to 
amend the Exchange's opening process to allow for an opening auction, 
similar to that available on Cboe Exchange, Inc. (``Cboe Options'') and 
Cboe EDGX Exchange, Inc. (``EDGX Options''), and make other conforming 
changes to Rules 16.1 and 21.17. The text of the proposed rule changes 
are provided in Exhibit 5.
    The text of the proposed rule change is also available on the 
Exchange's website (http://markets.cboe.com/us/equities/regulation/rule_filings/bzx/), at the Exchange's Office of the Secretary, and at 
the Commission's Public Reference Room.

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

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

1. Purpose
    Exchange Rule 21.7 sets forth the opening process the Exchange uses 
to open series on the Exchange at the market open each trading day (and 
after trading halts). Pursuant to the current opening process, the 
System determines an opening price for a series based on the National 
Best Bid and Offer (``NBBO'') \3\ and crosses any interest on the book 
that is marketable at that price. The proposed rule change adopts an 
opening auction process, substantially similar to the Cboe Options and 
EDGX Options opening auction process.\4\ The Exchange believes an 
opening auction process will enhance the openings of series on the 
Exchange by providing an opportunity for price discovery based on then-
current market conditions. Pursuant to the proposed opening auction 
process, the Exchange will have a Queuing Period, during which the 
System will accept orders and quotes and disseminate expected opening 
information; will initiate an opening rotation upon the occurrence of 
certain triggers; will conduct an opening rotation during which the 
System matches and executes orders and quotes against each other in 
order to establish an opening Exchange best bid and offer and trade 
price, if any, for each series, subject to certain price protections; 
and will open series for trading.\5\
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    \3\ The opening price (if not outside the NBBO and no more than 
a specified minimum amount away from the NBBO) is either the 
midpoint of the NBBO, the last disseminated transaction price after 
9:30 a.m., or the last transaction price from the previous trading 
day. See current Rule 21.7(b).
    \4\ See Cboe Options Rule 5.31 and EDGX Options Rule 21.7.
    \5\ The order of events that comprise this proposed opening 
auction process corresponds to the opening auction process on Cboe 
Options and EDGX Options. See Cboe Options Rule 5.31 and EDGX 
Options Rule 21.7.
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    Proposed Rule 21.7(a) sets forth the definitions of the following 
terms for purposes of the opening auction process in proposed Rule 
21.7: \6\
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    \6\ A term defined elsewhere in the Rules has the same meaning 
with respect to Rule 21.7, unless otherwise defined in Rule 21.7. 
See Cboe Options Rule 5.31(a) and EDGX Options Rule 21.7(a).
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     Composite Market: The term ``Composite Market'' means the 
market for a series comprised of (1) the higher of the then-current 
best appointed Market-Maker bulk message bid on the Queuing Book and 
the away best bid (``ABB'') \7\ (if there is an ABB) and (2) the lower 
of the then-current best appointed Market-Maker bulk message offer on 
the Queuing Book and the away best offer (``ABO'') \8\ (if there is an 
ABO). The term ``Composite Bid (Offer)'' means the bid (offer) used to 
determine the Composite Market.\9\
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    \7\ See the definition of ``ABBO'' included in proposed Rule 
16.1.
    \8\ Id.
    \9\ Cboe Options and EDGX Options similarly consider the 
Exchange's best quote bid and best quote offer when determining 
whether the Exchange's market is too wide.
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     Composite Width: The term ``Composite Width'' means the 
width of the Composite Market (i.e., the width between the Composite 
Bid and the Composite Offer) of a series.
     Maximum Composite Width: The term ``Maximum Composite 
Width'' means the amount that the Composite Width of a series may 
generally not be greater than for the series to open (subject to 
certain exceptions, as described below). The Exchange determines this 
amount on a class and Composite Bid basis, which amount the Exchange 
may modify during the opening auction process (which modifications the 
Exchange disseminates to all subscribers to the Exchange's data feeds 
that deliver opening auction updates).
     Opening Auction Updates: The term ``opening auction 
updates'' means Exchange-disseminated messages that contain information 
regarding the expected opening of a series based on orders and quotes 
in the Queuing Book, including the expected opening price, the then-
current cumulative size on each side at or more aggressive than the 
expected opening price, and whether the series would open (and any 
reason why a series would not open).
     Opening Collar: The term ``Opening Collar'' means the 
price range that establishes limits at or inside of which the System 
determines the Opening Trade Price for a series. The Exchange 
determines the width of this price range on a class and Composite Bid 
basis, which range the Exchange may modify during the opening auction 
process (which modifications the Exchange disseminates to all 
subscribers to the Exchange's data feeds that deliver opening auction 
updates).
     Opening Trade Price: The term ``Opening Trade Price'' 
means the price at which the System executes opening trades in a series 
during the opening rotation.\10\
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    \10\ See current Rule 21.7(d).

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     Queuing Book: The term ``Queuing Book'' means the book 
into which Users may submit orders and quotes during the Queuing Period 
for participation in the application opening rotation. Orders and 
quotes on the Queuing Book may not execute until the opening rotation.
     Queuing Period: The term ``Queueing Period'' means the 
time period prior to the initiation of an opening rotation during which 
the System accepts orders and quotes for participation in the opening 
rotation for the applicable trading session.\11\
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    \11\ See current Rule 21.7(a)(1) (the current rule does not use 
the term ``Queuing Period''; however, it does provide for an order 
entry period prior to the opening of a series during which the 
System accepts orders and quotes). The proposed rule change moves 
the rule provisions regarding the opening process following a halt 
to proposed paragraph (g), with no substantive changes.
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    Proposed paragraph (b) describes the Queuing Period. The Queuing 
Period begins at 7:30 a.m. for all classes.\12\ This is the same time 
at which the System begins accepting orders and quotes today. 
Therefore, Users will have the same amount of time to submit orders and 
quotes prior to the opening. Proposed subparagraph (b)(2) clarifies 
that orders and quotes on the Queuing Book are not eligible for 
execution until the opening rotation pursuant to proposed paragraph 
(e), as described below. This is consistent with current order entry 
period, pursuant to which orders and quotes entered for inclusion in 
the opening process do not execute until the opening trade pursuant to 
current paragraph (d). The System accepts all orders and quotes that 
are available for a class and trading session pursuant to Rule 21.1 
during the Queuing Period, which are eligible for execution during the 
opening rotation, except as follows:
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    \12\ See proposed Rule 21.7(b)(1).
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     The System rejects Immediate-or-Cancel (``IOC'') and Fill-
or-Kill (``FOK'') orders during the Queuing Period; \13\
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    \13\ See current paragraph (a) and proposed subparagraph 
(b)(2)(A); see also Cboe Options Rule 5.31(b)(2)(A) and EDGX Options 
Rule 21.7(b)(2)(A).
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     the System accepts orders and quotes with Match Trade 
Prevention (``MTP'') Modifiers during the Queuing Period, but does not 
enforce them during the opening rotation; \14\
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    \14\ See proposed subparagraph (b)(2)(B). This is consistent 
with current functionality, and the detail is being added to the 
Rules. See also Cboe Options Rule 5.31(b)(2)(B) and EDGX Options 
Rule 21.7(b)(2)(B).
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     the System accepts Stop and Stop Limit Orders \15\ during 
the Queuing Period, but they do not participate during the opening 
rotation. The System enters any of these orders it receives during the 
Queuing Period into the Book following completion of the opening 
rotation (in time priority); \16\ and
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    \15\ Pursuant to Exchange Rule 21.1(d)(11) and (12), Stop and 
Stop Limit Orders are triggered based on the consolidated last sale 
price. Not participating in the opening process is consistent with 
this requirement, as the Exchange needs to be open (and thus have an 
opening trade occur) in order for there to be a consolidated last 
sale price that can trigger these orders. See also Cboe Options Rule 
5.31(b)(2)(C) and EDGX Options Rule 21.7(b)(2)(C).
    \16\ This is consistent with current functionality, and the 
proposed rule change is adding this detail to the Rules.
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     the System converts all Intermarket Sweep Orders 
(``ISOs'') received prior to the completion of the opening rotation 
into non-ISOs.\17\
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    \17\ See current paragraph (a) and proposed subparagraph 
(b)(2)(D); see also Cboe Options Rule 5.31(b)(2)(D) and EDGX Options 
Rule 21.7(b)(2)(D) (which does not permit ISOs to be entered during 
the Cboe Options pre-opening period).
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    Proposed paragraph (c) describes the opening auction updates the 
Exchange will disseminate as part of the opening auction process. As 
noted above, opening auction updates contain information regarding the 
expected opening of a series. These messages provide market 
participants with information that may contribute to enhanced liquidity 
and price discovery during the opening auction process. Beginning at a 
time (determined by the Exchange) no earlier than one hour prior to the 
expected initiation of the opening rotation and until the conclusion of 
the opening rotation for a series, the Exchange disseminates opening 
auction updates for the series. The Exchange disseminates opening 
auction updates at regular intervals of time (the length of which the 
Exchange determines for each trading session), or less frequently if 
there are no updates to the opening information since the previously 
disseminated update, to all subscribers to the Exchange's data feeds 
that deliver these messages until a series opens. If there have been no 
changes since the previous update, the Exchange does not believe it is 
necessary to disseminate duplicate updates to market participants at 
the next interval of time.\18\
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    \18\ See Cboe Options Rule 5.31(c) and EDGX Options Rule 
21.7(c).
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    Proposed paragraph (d) describes the events that will trigger the 
opening rotation for a class. Pursuant to current paragraph (b), the 
System will automatically open a related equity option series after the 
first transaction on the primary listing market after 9:30 a.m. Eastern 
Time in the securities underlying the options as reported on the first 
print disseminated pursuant to an effective national market system plan 
(with respect to equity options). Pursuant to current paragraph (c), 
the System automatically opens a related index option series after an 
away options exchange(s) disseminates a quote in an index option series 
(with respect to index options).
    The Exchange proposes to adopt opening rotation triggers applicable 
to both equity options and index options. As it pertains to equity 
options, the Exchange proposes to include the System's observation of 
the first disseminated quote \19\ and transaction on the primary market 
in the security underlying the equity options as an opening trigger for 
equity options.\20\ Specifically, as proposed, the System will initiate 
the opening rotation after an Exchange-determined time period (which 
the Exchange determines for all classes) upon the earlier of (A) the 
passage of two minutes (or such shorter time as determined by the 
Exchange) after the System's observation after 9:30 a.m. Eastern Time 
of either the first disseminated transaction or the first disseminated 
quote on the primary listing market in the security underlying an 
equity option; or (B) the System's observation after 9:30 a.m. Eastern 
Time of both the first disseminated transaction and the first 
disseminated quote on the primary listing market in the security 
underlying an equity option. The Exchange notes that the proposed 
triggers are intended to tie the Exchange's opening process to quoting 
and/or trading in the underlying security. The Exchange believes that 
quoting activity in the underlying market is a trigger that generally 
indicates the presence of post-open price discovery and liquidity in 
the primary market for the underlying, and, therefore, that the market 
for the underlying is adequately situated for the commencement of 
options trading the underlying.
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    \19\ The quote must be a two-sided quote.
    \20\ See Cboe Options Rule 5.31(d)(1)(A)(i)-(ii) and EDGX 
Options Rule 21.7(d)(1)(A)(i)-(ii).
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    The proposed timing steps in connection with the equity option 
opening triggers are intended to ensure that the market for the 
underlying security has had sufficient time to open prior to the 
initiation of the opening rotation where there is not both a two-sided 
quote and an execution in the underlying security. By waiting a 
requisite amount of time after the System observes one of the opening 
triggers, the proposed process pursuant to proposed Rule 21.7(d)(1)(A) 
is intended to permit post-opening price discovery to occur in the 
underlying security prior to the opening of options on the security. 
Similarly, by initiating the opening rotation upon the System's 
observation of both opening triggers

[[Page 6248]]

prior to the passage of two minutes, proposed Rule 21.7(d)(1)(B) ties 
the Exchange's opening process to specific market conditions in the 
underlying security that generally indicate that sufficient post-
opening price discovery has occurred prior to the opening of options on 
the security. To illustrate, if the System were to observe a 
disseminated quote (or transaction) in the primary market for the 
underlying security, it would begin the two-minute (or shorter) timer 
pursuant to proposed Rule 21.7(d)(1)(A). If two minutes then passed 
without the System's observation of a disseminated transaction (or 
quote) on the primary market for the underlying security (which would 
cause the scenario in Rule 21.7(d)(1)(B) to occur) then it would 
initiate the opening rotation after a time period determined by the 
Exchange. Conversely, if the System were to observe a disseminated 
quote (or transaction) in the primary listing market and begin the two 
minute (or shorter) timer, but then observe a disseminated transaction 
(or quote) in the primary listing market before the passage of two 
minutes (or shorter), it would then, at the time it observed the 
disseminated transaction (or quote) prior to the passage of two minutes 
(or shorter), initiate the opening rotation after a period of time 
determined by the Exchange.
    As it pertains to index options, the Exchange proposes to initiate 
the opening rotation after a time period (which the Exchange determines 
for all classes) following the System's observation after 9:30 a.m. 
Eastern Time of the first disseminated index value for the index 
underlying an index option.\21\ The Exchange notes that the proposed 
trigger is intended to tie the Exchange's opening process to the 
disseminated index value of the underlying index.
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    \21\ See Cboe Options Rule 5.31(d)(2) and EDGX Options Rule 
21.7(d)(2).
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    Proposed paragraph (e) describes the opening rotation process, 
during which the System will determine whether the Composite Market for 
a series is not wider than a maximum width, will determine the opening 
price, and open the series.\22\ The Maximum Composite Width Check and 
Opening Collar are intended to ensure that series open in a fair and 
orderly manner and at prices consistent with the current market 
conditions for the series and not at extreme prices, while taking into 
consideration prices disseminated from other options exchanges that may 
be better than the Exchange's at the open.
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    \22\ See Cboe Options Rule 5.31(e), EDGX Options Rule 21.7(e), 
and Cboe C2 Exchange Inc. (``C2 Options'') Rule 5.31(e) (pursuant to 
which Cboe Options/EDGX Options will generally not open a series if 
the width is wider than an acceptable price range or if the opening 
trade price is outside of an acceptable price range). The Exchange 
will similarly have a maximum quote width and acceptable opening 
price range, however, they may be calculated differently.
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    Proposed subparagraph (e)(1) describes the Maximum Composite Width 
Check.
     If the Composite Market of a series is not crossed, and 
the Composite Width of the series is less than or equal to the Maximum 
Composite Width, the series is eligible to open (and the System 
determines the Opening Price as described below).
     If the Composite Market of a series is not crossed, and 
the Composite Width of the series is greater than the Maximum Composite 
Width, but there are no non-M Capacity \23\ market orders or buy (sell) 
limit orders with prices higher (lower) than the Composite Market 
midpoint and there are no locked or crossed orders or quotes, the 
series is eligible to open (and the System determines the Opening Price 
as described below).\24\
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    \23\ Capacity M is used for orders for the account of a Market-
Maker (with an appointment in the class). See U.S. Options Binary 
Order Entry Specifications, at 28 (definition of Capacity), 
available at http://cdn.cboe.com/resources/membership/US_Options_BOE_Specification.pdf.
    \24\ The Exchange notes that Cboe Options and EDGX Options 
recently amended subparagraph (e)(1)(B) to identically state that if 
the Composite Market of a series is not crossed, and the Composite 
Width of the series is greater than the Maximum Composite Width, but 
there are no non-M Capacity market orders or buy (sell) limit orders 
with prices higher (lower) than the Composite Market midpoint and 
there are orders or quotes marketable against each other, the series 
is eligible to open. See Securities Exchange Act Release Nos. 87707 
(filed December 4, 2019) (SR-CboeEDGX-2019-072) and 87706 (filed 
December 4, 2019) (SR-CBOE-2019-115).
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     If neither of the conditions above are satisfied for a 
series, or if the Composite Market of a series is crossed, the series 
is ineligible to open. The Queuing Period for the series will continue 
(including the dissemination of opening auction updates) until one of 
the above conditions for the series is satisfied, or the Exchange opens 
the series pursuant to paragraph (h).\25\
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    \25\ See Cboe Options Rule 5.31(e)(1)(C) and EDGX Options Rule 
21.7(e)(1)(C). The proposed rule change moves the provision 
regarding the Exchange's ability to deviate from the standard manner 
of the opening process from current paragraph (f) to proposed 
paragraph (h). Pursuant to the proposed rule change, the Exchange 
will make and maintain records to document all determinations to 
deviate from the standard manner of the opening auction process, and 
periodically review these determinations for consistency with the 
interests of a fair and orderly market (which, while not specified 
in the current Rules, the Exchange does today). See proposed Rule 
21.7(h).
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    The Exchange will use the Maximum Composite Width Check as a price 
protection measure to prevent orders from executing at extreme prices 
at the open. If the width of the Composite Market (which represents the 
best market, as it is comprised of the better of Market-Maker bulk 
messages on the Exchange or any away market quotes) is no greater than 
the Maximum Composite Width, the Exchange believes it is appropriate to 
open a series under these circumstances and provide marketable orders 
with an opportunity to execute at a reasonable opening price (as 
discussed below), because there is minimal risk of execution at an 
extreme price.
    Similarly, if the Composite Width is greater than the Maximum 
Composite Width but there are no non-M Capacity bids (offers) \26\ that 
are higher (lower) than the Composite Market midpoint (and thus not 
marketable at a price at which the Exchange would open, as described 
below), there is similarly limited risk of an order executing at an 
extreme price on the open. While it is possible for Market-Makers to 
submit orders to the Exchange at an extreme price, the Exchange 
believes there is less risk of a Market-Maker inputting an order at an 
extreme price given that Market-Makers are generally responsible for 
pricing the market. Given this, the Exchange believes it is appropriate 
to open a series under certain circumstances if M capacity bids and 
offers set the Composite Market when the Composite Width is wider than 
the Maximum Composite Market. Nonetheless, the Exchange also recognizes 
there may be circumstances under which a non-M capacity order may 
improve the Composite Market when the Composite Width is greater than 
the Maximum Composite Width. As such, the Exchange proposes to open a 
series if the Composite Width is greater than the Maximum Composite 
Width and there are non-M Capacity limit orders at a price better than 
the Composite Bid (Offer) in certain circumstances. Specifically, the 
proposed amendment will allow the Exchange to open a series if the 
Composite Width of a series is greater than the Maximum Composite 
Width, but there are no non-M Capacity market orders or buy (sell) 
limit orders with prices higher (lower) than the Composite Market 
midpoint and there

[[Page 6249]]

are no locked or crossed orders or quotes. The Exchange believes the 
proposed provision under proposed subparagraph (e)(1)(B) strikes a 
reasonable balance between protecting non-M capacity orders from 
executing at extreme prices and encouraging the submission of non-M 
capacity orders at prices that improve the Composite Market, as 
illustrated in examples two and three below.
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    \26\ Market-Maker bulk messages are considered when determining 
the Composite Market. The Exchange believes it is appropriate to 
consider Market-Maker bulk messages when determining an opening 
quote to ensure there will be liquidity in a series when it opens. 
Additionally, while Market-Makers may submit M capacity orders, the 
Exchange believes there is less risk of a Market-Maker inputting an 
order at an extreme price given that Market-Makers are generally 
responsible for pricing the market.
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    The following examples show the application of the Maximum 
Composite Width Check:
Example #1
    Suppose the Maximum Composite Width for a class is 1.00, and the 
Composite Market is 7.00 x 5.00, comprised of an appointed Market-Maker 
bulk message bid of 7.00 and an appointed Market-Maker bulk message 
offer of 5.00. There is no other interest in the Queuing Book. The fact 
that the Composite Market is greater than the Maximum Composite Width 
does not cause ineligibility to open as there are no non-M capacity 
market orders or buy (sell) limit orders with prices higher (lower) 
than the Composite Market midpoint. The series is not eligible to open 
because there are crossed orders or quotes in the series. The Queuing 
Period for the series will continue until the series satisfies the 
Maximum Composite Width Check.
Example #2
    Suppose the Maximum Composite Width for a class is 1.00, and the 
Composite Market is 5.00 x 7.00, comprised of an appointed Market-Maker 
bulk message bid of 5.00 and an appointed Market-Maker bulk message 
offer of 7.00. There is a non-M capacity limit order to buy for 5.75 in 
the Queuing Book. Prior to the open, the Exchange does not know the 
market value of the option series; however, assume that the intrinsic 
value of the option series is 5.75. In this case, the series would be 
eligible to open because the width of the Composite Market is greater 
than the Maximum Composite Width and the non-M Capacity order is at a 
price less than the Composite Market midpoint. The System will then 
determine the Opening Trade Price.
Example #3
    Suppose the Maximum Composite Width for a class is 1.00, and the 
Composite Market is 5.00 x 20.00, comprised of an appointed Market-
Maker bulk message bid of 5.00 and an appointed Market-Maker bulk 
message offer of 20.00. There is a non-M Capacity limit order to buy 
for 18.00 in the Queuing Book. Prior to the open, the Exchange does not 
know the market value of the option series; however, assume that the 
intrinsic value of the option series is 6.00 In this case, the series 
is not eligible to open because the width of the Composite Market is 
greater than the Maximum Composite Width, and there is a non-M Capacity 
bid at a price higher than the Composite Market midpoint of 12.50. The 
Queuing Period for the series will continue until the series satisfies 
the Maximum Composite Width Check.
    As proposed, subparagraph (e)(1)(B) will allow the Exchange to open 
a series if the Composite Market of a series is greater than the 
Maximum Composite Width, but there are no non-M Capacity market orders 
or buy (sell) limit orders with prices higher (lower) than the 
Composite Market midpoint and there are no locked or crossed orders or 
quotes. Thus, under proposed subparagraph (e)(1)(B), the Exchange would 
allow the option series to open in Example #2 above as the non-M 
capacity limit bid was entered at a price lower than the Composite 
Market midpoint. However, the proposed amendment would limit the risk 
of a non-M capacity order executing at an extreme price such as that in 
Example #3 as the non-M capacity limit bid was entered at a price 
higher than the Composite Market midpoint.
    Proposed subparagraph (e)(2) describes how the System determines 
the Opening Trade Price for a series after it satisfies the Maximum 
Composite Width Check described above.
     The Opening Trade Price is the price that is not outside 
the Opening Collar and is the volume-maximizing, imbalance minimizing 
price (``VMIM price''):
    [cir] the price at which the largest number of contracts can 
execute (i.e., the volume-maximizing price);
    [cir] if there are multiple volume-maximizing prices, the price at 
which the fewest number of contracts remain unexecuted (i.e., the 
imbalance-minimizing price); or
    [cir] if there are multiple volume-maximizing, imbalance-minimizing 
prices, (1) the highest (lowest) price, if there is a buy (sell) 
imbalance, or (2) the price at or nearest to the midpoint of the 
Opening Collar, if there is no imbalance.
     There is no Opening Trade Price if there are no locked or 
crossed orders or quotes at a price not outside the Opening Collar.\27\
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    \27\ See current Rule 21.7(e).
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    The Exchange believes the proposed volume-maximizing, imbalance-
minimizing procedure is reasonable, as it will provide for the largest 
number of contracts in the Queuing Book that can execute, leaving as 
few as possible bids and offers in the Book that cannot execute. The 
Exchange will use the Opening Collar as a price protection measure to 
prevent orders from executing at extreme prices at the open. If the 
Opening Trade Price is not outside the Opening Collar (which will be 
based on the best then-current market), the Exchange believes it is 
appropriate to open a series at that price, because there is minimal 
risk of execution at an extreme price. However, if the Opening Trade 
Price would be outside of the Opening Collar, the Exchange believes 
there may be risk that orders would execute at an extreme price if the 
series opens, and therefore the Exchange will not open a series.
    Pursuant to proposed subparagraph (e)(3), if the System establishes 
an Opening Trade Price, the System will execute orders and quotes in 
the Queuing Book at the Opening Trade Price. The System will prioritize 
orders and quotes in the following order: market orders, limit orders 
and quotes with prices better than the Opening Trade Price, and orders 
and quotes at the Opening Trade Price.\28\ If there is no Opening Trade 
Price, the System opens a series without a trade. As set forth in 
Exchange Rule 21.8, the Exchange's execution algorithm executes trading 
interest in price/time priority. However, for purposes of the Opening 
Auction Process, the Exchange's execution algorithm will execute 
trading interest in a pro-rata fashion, similar to that provided on 
EDGX Options and Cboe Options.\29\ With pro-rata allocation, if there 
are two or more orders or quotes at the best price then the contracts 
are allocated proportionally according to size. The executable quantity 
is allocated to the nearest whole number, with fractions \1/2\ or 
greater rounded up and fractions less than \1/2\ rounded down. The 
primary reason for pro-rata allocation in the Opening Auction

[[Page 6250]]

Process is that all orders will execute at the same price, thus 
priority would only be given on the time at which the orders were 
entered. Given that these orders would be entered during the during a 
[sic] Queuing Period and waiting for execution at the same time, there 
is no reason to provide a benefit for the speed of entry. Pursuant to 
proposed subparagraph (f), as is the case today, following the 
conclusion of the opening rotation, the System enters any unexecuted 
orders and quotes (or remaining portions) from the Queuing Book into 
the BZX Options Book in time sequence (subject to a User's 
instructions--for example, a User may cancel an order), where they may 
be processed in accordance with Rule 21.8.\30\ Consistent with the OPG 
\31\ contingency (and current functionality), the System cancels any 
unexecuted OPG orders (or remaining portions) following the conclusion 
of the opening rotation.
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    \28\ See current Rule 21.7(d) (which states the System matches 
(in accordance with Rule 21.8) orders and quotes in the System 
priced equal to or more aggressively than the Opening Price). See 
also Cboe Options Rule 5.31(e)(3)(A)(i) and EDGX Options Rule 
21.7(e)(3)(A)(i). The Exchange believes it is appropriate to 
prioritize orders with the most aggressive prices, as it provides 
market participants with incentive to submit their best-priced 
orders.
    \29\ EDGX Options and Cboe Options allocate orders and quotes at 
the same price pursuant to the allocation algorithm that applies to 
a class intraday (in accordance with EDGX Options Rule 21.8/Cboe 
Options Rule 5.32), unless the relevant exchange determines to apply 
a different allocation algorithm to a class during the opening 
rotation. Currently, both EDGX Options and Cboe Options use pro-rata 
allocation for the Opening Auction Process.
    \30\ The proposed rule change corrects an error in the current 
Rule, which references Rule 21.9 rather than Rule 21.8.
    \31\ See Exchange Rule 21.1(f)(6).
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    The proposed rule change adds paragraph (i), which provides if the 
underlying security for a class is in a limit up-limit down state when 
the opening rotation begins for that class, then the System cancels or 
rejects all market orders. In addition, if the opening rotation has 
already begun for a class when a limit up-limit down state initiates 
for the underlying security of that class, market and limit orders will 
continue through the end of the opening rotation.\32\
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    \32\ This is consistent with the definition of market orders in 
Rule 21.1(d)(5).
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    Currently, if an order enters the Book following the Opening 
Process (which would include any Good Til Cancelled (``GTC'') or Good 
Til Date (``GTD'') orders that reenter the Book from the prior trading 
day) and become subject to the drill-through protection pursuant to 
Rule 21.17(d), the NBO (NBB) that existed at the time it enters (or 
reenters) the Book would be used when determining the drill-through 
price. Proposed Rule 21.17(d)(1) provides that if an order that enters 
the BZX Options Book following the Opening Auction Process and becomes 
subject to the drill-through protection, the bid (offer) limit of the 
Opening Collar plus (minus) the buffer amount will be the drill-through 
price. As discussed above, the Opening Collar is a price protection, 
and the Exchange would execute orders at the open at prices at or 
within the Opening Collar (as it would execute orders at or within the 
NBBO). Therefore, the Exchange believes the Opening Collar limit price 
points are reasonable to use when determining the drill-through price 
for orders that are unable to execute during the opening rotation.
    The Exchange notes that certain provisions of Cboe Options Rule 
5.31 and EDGX Options Rule 21.7 are not proposed for inclusion in 
Exchange Rule 21.7. Specifically, subparagraph (b)(2)(C) of Cboe 
Options and EDGX Options provides that all-or-none orders are not 
eligible for execution during the opening rotation. However, because 
the Exchange does not support all-or-none orders, such a provision is 
not included in the proposed Rule. Similarly, subparagraph (b)(2)(E) of 
Cboe Options Rule 5.31 and EDGX Options Rule 21.7 provides that complex 
orders do not participate in the opening auction process, which is also 
not applicable to BZX Options as the Exchange does not support a 
complex options book. Paragraph (d) of Cboe Options Rule 5.31 and EDGX 
Options Rule 21.7 provides for opening rotation triggers during both 
Regular Trading Hours and Global Trading Hours; however, as the 
Exchange does not support Global Trading Hours no such applicable 
provision is proposed. Lastly, paragraph (j) of Cboe Options Rule 5.31 
provides a modified opening process for volatility settlements which is 
not applicable to BZX Options as such products are not traded on the 
Exchange.
    The proposed amendments to Rule 16.1 include the clarification and 
addition of definitions to conform with existing Cboe Options and EDGX 
Options rules. Such proposed amendments involve no substantive changes.
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.\33\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \34\ 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) \35\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \33\ 15 U.S.C. 78f(b).
    \34\ 15 U.S.C. 78f(b)(5).
    \35\ Id.
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    The Exchange believes the proposed rule change to adopt an opening 
auction will protect investors, because it will enhance the openings of 
series on the Exchange by providing an opportunity for price discovery 
based on then-current market conditions. The proposed Queuing Period is 
substantively the same as the current Order Entry Period on the 
Exchange. The proposed detail regarding the Queuing Period provides 
additional transparency regarding the handling of orders and quotes 
submitted during that time, and will thus benefit investors. The 
proposed rule change, including orders that are not permitted during 
the Queuing Period or orders that are not eligible to trade during the 
opening rotation, is also similar to the pre-opening period on Cboe 
Options and EDGX Options.\36\
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    \36\ See Cboe Options Rule 5.31(a) and EDGX Options Rule 
21.7(a).
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    The proposed rule change will protect investors by ensuring they 
have access to information regarding the opening of a series, which 
will provide them with transparency that will permit them to 
participate in the opening auction process and contribute to, and 
benefit from, the price discovery the auction may provide. The proposed 
opening auction updates are not be designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers, as all 
market participants may subscribe to the Exchange's data feeds that 
deliver these message, and thus all market participants may have access 
to this information.
    The proposed opening rotation triggers are substantially similar to 
the current events that will trigger series openings on the Cboe 
Options and EDGX Options. The proposed trigger events will remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, as they ensure that the underlying securities 
will have begun trading, or the underlying index values will have begun 
being disseminated, before the System opens a series for trading.
    The proposed Maximum Composite Width Check and Opening Collar will 
protect investors by providing price protection measures to prevent 
orders from executing at extreme prices at the

[[Page 6251]]

open. The Exchange believes it is appropriate to open a series under 
the proposed circumstances and provide marketable orders with an 
opportunity to execute at a reasonable opening price (as discussed 
below), because there is minimal risk of execution at an extreme price. 
Furthermore, the Exchange believes proposed Rule 21.7(e)(1)(B) will 
benefit market participants as it may encourage the submission of 
orders at prices that improve the Composite Market in the Opening 
Auction Process on the Exchange, and allow the Exchange to open series 
earlier, which may also allow for more trading opportunities on the 
Exchange throughout the trading day. The proposed price protections 
incorporate all available pricing information, including Market-Maker 
bulk messages (which are generally used to price markets for series) 
and any quotes disseminated from away markets, and thus may lead to a 
more accurate Opening Trade Price based on then-current market 
conditions. As noted above, Cboe Options and EDGX Options apply similar 
price protections during its opening rotation. Cboe Options and EDGX 
Options similarly consider Market-Maker quotes (the equivalent of 
Market-Maker bulk message on EDGX Options and the Exchange), and in 
certain classes, quotes of away exchanges, and whether there are 
crossing orders or quotes when determining whether the opening width 
and trade price are reasonable.
    The proposed priority with respect to trades during the opening 
rotation are consistent with current priority principles that protect 
investors, which are to provide priority to more aggressively priced 
orders and quotes. Orders and quotes will be subject to the same 
allocation algorithms that the Exchange may apply during the trading 
day. The proposed priority and allocation of orders and quotes at the 
opening trade is substantially similar to the priority and allocation 
of orders and quotes at the opening of Cboe Options and EDGX 
Options.\37\
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    \37\ See Cboe Options Rule 5.31(e)(3)(A) and EDGX Options Rule 
21.7(e)(3)(A).
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    The Exchange believes the proposed opening auction process is 
designed to ensure sufficient liquidity in a series when it opens and 
ensure series open at prices consistent with then-current market 
conditions, and thus will ensure a fair and orderly opening process. 
Additionally, as noted above, the proposed opening auction process is 
substantially similar to the opening auction process of Cboe Options 
and EDGX Options.\38\ The differences between proposed Rule 21.7 and 
Cboe Options Rule 5.31 and EDGX Options Rule 21.7 primarily relate to 
differences between the exchanges, including functionality Cboe Options 
and EDGX Options offer that the Exchange does not and products Cboe 
Options and EDGX Options list for trading that the Exchange does not.
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    \38\ See Cboe Options Rule 5.31 and EDGX Options Rule 21.7.
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    The proposed rule change is generally intended to align system 
functionality currently offered by the Exchange with Cboe Options and 
EDGX Options functionality in order to provide a consistent technology 
offering for the Cboe Affiliated Exchanges. A consistent technology 
offering, in turn, will simplify the technology changes and maintenance 
by Users of the Exchange that are also participants on Cboe Affiliated 
Exchanges. The Exchange believes this consistency will promote a fair 
and orderly national options market system. Users of the Exchange and 
other Cboe Affiliated Exchanges have access to similar functionality on 
all Cboe Affiliated Exchanges. As such, the proposed rule change would 
foster cooperation and coordination with persons engaged in 
facilitating transactions in securities and would remove impediments to 
and perfect the mechanism of a free and open market and a national 
market system.

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 Exchange does not 
believe that the proposed rule change to adopt an opening auction 
process will impose any burden on intramarket competition that is not 
necessary or appropriate in furtherance of the purposes of the Act, 
because it will apply to orders and quotes of all market participants 
in the same manner. The same order types that are not currently 
accepted prior to the opening, and that do not participate in the 
opening process, will similarly not be accepted during the Queuing 
Period or be eligible for trading during the opening rotation.
    The Exchange does not believe that the proposed rule change to 
adopt an opening auction process will impose any burden on intermarket 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act, because it is designed to open series on the 
Exchange in a fair and orderly manner. The Exchange believes an opening 
auction process will enhance the openings of series on the Exchange by 
providing an opportunity for price discovery based on then-current 
market conditions. The proposed auction process will provide an 
opportunity for price discovery when a series opens, ensure there 
sufficient liquidity in a series when it opens, and ensure series open 
at prices consistent with then-current market conditions (at the 
Exchange and other exchanges) rather than extreme prices that could 
result in unfavorable executions to market participants. Additionally, 
as discussed above, the proposed opening auction process is 
substantially similar to the Cboe Options and EDGX Options opening 
auction process.\39\
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    \39\ See Cboe Options Rule 5.31 and EDGX Options Rule 21.7.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange neither solicited nor received comments on the 
proposed rule change.

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

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \40\ and Rule 19b-4(f)(6) thereunder.\41\ 
Because the 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, if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act \42\ and Rule 19b-
4(f)(6) thereunder.\43\
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    \40\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \41\ 17 CFR 240.19b-4(f)(6).
    \42\ 15 U.S.C. 78s(b)(3)(A).
    \43\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires the Exchange to give the Commission written notice of the 
Exchange's 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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    A proposed rule change filed under Rule 19b-4(f)(6) \44\ normally 
does not become operative for 30 days after the date of the filing. 
However, pursuant to

[[Page 6252]]

Rule 19b-4(f)(6)(iii),\45\ the Commission may designate a shorter time 
if such action is consistent with the protection of investors and the 
public interest. The Exchange has asked the Commission to waive the 30-
day operative delay so that the proposed rule change may become 
operative immediately. The Exchange represents that the functionality 
of the proposed auction process is scheduled to become available on 
January 30, 2020. Furthermore, the Exchange states that the proposed 
auction process is virtually identical to the one used on the Cboe 
Affiliated Exchanges, and that waiver of the operative delay would 
enable the Exchange to continue its efforts to provide a technology 
offering consistent with those of the Cboe Affiliated Exchanges as 
promptly as possible. The Exchange believes that such consistency will 
simplify the technology changes and maintenance by Options Members of 
the Exchange that are also participants on Cboe Affiliated Exchanges. 
For these reasons, the Commission believes that waiver of the 30-day 
operative delay is consistent with the protection of investors and the 
public interest. Accordingly, the Commission hereby waives the 30-day 
operative delay and designates the proposal operative upon filing.\46\
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    \44\ 17 CFR 240.19b-4(f)(6).
    \45\ 17 CFR 240.19b-4(f)(6)(iii).
    \46\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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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 necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule change 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-CboeBZX-2020-012 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-CboeBZX-2020-012. 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-CboeBZX-2020-012, and should be 
submitted on or before February 25, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\47\
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    \47\ 17 CFR 200.30-3(a)(12), (59).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-02049 Filed 2-3-20; 8:45 am]
 BILLING CODE 8011-01-P


