[Federal Register Volume 85, Number 51 (Monday, March 16, 2020)]
[Notices]
[Pages 15003-15009]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-05236]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88350; File No. SR-CBOE-2020-015]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change To Increase Position Limits for 
Options on Certain Exchange-Traded Funds (``ETFs'') and Indexes

March 10, 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 February 26, 2020, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe 
Options'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the 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 Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes 
increase position limits for options on certain exchange-traded funds 
(``ETFs'') and indexes. The text of the proposed rule change is 
provided in Exhibit 5.
    The text of the proposed rule change is also available on the 
Exchange's website (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
    Position limits are designed to address potential manipulative 
schemes and adverse market impacts surrounding the use of options, such 
as disrupting the market in the security underlying the options. While 
position limits should address and discourage the potential for 
manipulative schemes and adverse market impact, if such limits are set 
too low, participation in the options market may be discouraged. The 
Exchange believes that position limits must therefore be balanced 
between mitigating concerns of any potential manipulation and the cost 
of inhibiting potential hedging activity that could be used for 
legitimate economic purposes.
    The Exchange has observed an ongoing increase in demand in options 
on (1) the Standard and Poor's Depositary Receipts Trust (``SPY''), 
iShares MSCI EAFE ETF (``EFA''), iShares China Large-Cap ETF (``FXI''), 
iShares iBoxx High Yield Corporate Bond Fund (``HYG''), Financial 
Select Sector SPDR Fund (``XLF''), Market Vectors Oil Services ETF 
(``OIH'', collectively, with the aforementioned ETFs, the ``Underlying 
ETFs''), and (2) the MSCI Emerging Markets Index (``MXEF'') and the 
MSCI EAFE Index (``MXEA'', collectively, with MXEF, the ``Underlying 
Indexes'') for both trading and hedging purposes. Though the demand for 
these options appears to have increased, position limits for options on 
the Underlying ETFs and Indexes have remained the same. The Exchange 
believes these unchanged position limits may have impeded, and may 
continue to impede, trading activity and strategies of investors, such 
as use of effective hedging vehicles or income generating strategies 
(e.g., buy-write or put-write), and the ability of Market-Makers to 
make liquid markets with tighter spreads in these options resulting in 
the transfer of volume to over-the-counter (``OTC'') markets. OTC 
transactions occur through bilateral agreements, the terms of which are 
not publicly disclosed to the marketplace. As such, OTC transactions do 
not contribute to the price discovery process on a public exchange or 
other lit markets. Therefore, the Exchange believes that the proposed 
increases in position limits for options on the Underlying ETFs and 
Indexes may enable liquidity providers to provide additional liquidity 
to the Exchange and other market participants to transfer their 
liquidity demands from OTC markets to the Exchange, as well as other 
options exchange on which they participate.\3\ As described in further 
detail below, the Exchange believes that the continuously increasing 
market capitalization of the Underlying ETFs, ETF component securities, 
and component securities of the Underlying Indexes, as well as the 
highly liquid markets for those securities, reduces the concerns for 
potential market manipulation and/or disruption in the underlying 
markets upon increasing position limits, while the rising demand for 
trading options on the Underlying ETFs and Indexes for legitimate 
economic purposes compels an increase in position limits.
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    \3\ The Exchange understands that other options exchanges intend 
to file similar proposed rule changes with the Commission to 
increase position limits under their rules for the same options.
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Proposed Position Limits for Options on the Underlying ETFs
    Position limits for options on ETFs are determined pursuant to Rule 
8.30, and vary according to the number of outstanding shares and the 
trading volumes of the underlying stocks or ETFs over the past six 
months. Pursuant to Exchange Rule 8.30, the largest in capitalization 
and the most frequently traded stocks and ETFs have an option position 
limit of 250,000 contracts (with adjustments for splits, re-
capitalizations, etc.) on the same side of the market; and smaller 
capitalization stocks and ETFs have position limits of 200,000, 75,000, 
50,000 or 25,000 contracts (with adjustments for splits, re-
capitalizations, etc.) on the same side of the market. Options on HYG, 
XLF, and OIH are currently subject to the standard position limit of 
250,000 contracts as set

[[Page 15004]]

forth in Exchange Rule 8.30. Rule 8.30.07 sets forth separate position 
limits for options on specific ETFs, including SPY, FXI and EFA.
    The Exchange proposes to amend Rule 8.30.07 to double the position 
limits and, as a result, exercise limits, for options on each of HYG, 
XLF, OIH, FXI, EFA and SPY.\4\ The table below represents the current, 
and proposed, position limits for options on the ETFs subject to this 
proposal:
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    \4\ By virtue of 8.42.02, which is not being amended by this 
filing, the exercise limits for HYG, XLF, OIH, and SPY options would 
be similarly increased.

------------------------------------------------------------------------
                                                  Current      Proposed
                      ETF                         position     position
                                                   limit        limit
------------------------------------------------------------------------
SPY...........................................    1,800,000    3,600,000
EFA...........................................      500,000    1,000,000
FXI...........................................      500,000    1,000,000
HYG...........................................      250,000      500,000
OIH...........................................      250,000      500,000
XLF...........................................      250,000      500,000
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    The Exchange notes that the proposed position limits for options on 
EFA and FXI are consistent with existing position limits for options on 
the iShares Russell 2000 ETF (``IWM'') and the iShares MSCI Emerging 
Markets ETF (``EEM''), while the proposed limits for options on FXI, 
HYG, and OIH are consistent with current position limits for options on 
the iShares MSCI Brazil Capped ETF (``EWZ''), iShares 20+ Year Treasury 
Bond Fund ETF (``TLT''), and iShares MSCI Japan ETF (``EWJ''). The 
Exchange represents that the Underlying ETFs qualify for either (1) the 
initial listing criteria set forth in Exchange Rule 4.3.06(c) for ETFs 
holding non-U.S. component securities, or (2) generic listing standards 
for series of portfolio depository receipts and index fund shares based 
on international or global indexes under which a comprehensive 
surveillance agreement (``CSA'') is not required, as well as the 
continued listing criteria in Rule 4.4.\5\ In compliance with its 
listing rules, the Exchange also represents that non-U.S. component 
securities that are not subject to a comprehensive surveillance 
agreement (``CSA'') do not, in the aggregate, represent more than more 
than 50% of the weight of any of the Underlying ETFs.\6\
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    \5\ The Exchange notes that the initial listing criteria for 
options on ETFs that hold non-U.S. component securities are more 
stringent than the maintenance listing criteria for those same ETF 
options. See Rule 4.3.06(c); Rule 4.4.08.
    \6\ See Rule 4.3.06(c).
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Proposed Position Limits for Options on the Underlying Indexes
    The position limits and certain restrictions on position limits for 
options on broad-based indexes are determined pursuant to Rule 8.31. 
Like Rule 8.30.07, Rule 8.31 sets forth separate position limits for 
various, specific broad-based indexes and also provides a position 
limit of 25,000 contracts for options, restricted to no more than 
15,000 near-term, on all other broad-based indexes not specifically 
listed under Rule 8.31. MXEF and MXEA are currently grouped within this 
category and, therefore, currently have position limits of 25,000 
contracts. The Exchange proposes to amend Rule 8.31 to double the 
position limits, and, as a result, the exercise limits, for MXEF and 
MXEA, as well as eliminate the near-term position limit restriction on 
such options. The table below represents the current, and proposed, 
position limits for options on MXEA and MXEF:

------------------------------------------------------------------------
                                            Current          Proposed
                                        position  limit/ position  limit/
                 Index                     near-term        near-term
                                         position limit   position limit
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MXEF..................................    25,000/15,000     50,000/None.
MXEA..................................    25,000/15,000     50,000/None.
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    The Exchange notes that these proposed position limits for MXEA and 
MXEF equal the current position limits for options on 20 other indexes, 
and notes that no near-term restrictions currently exist for options on 
15 other indexes.\7\ The Exchange represents that the Underlying 
Indexes qualify for the initial and maintenance listing criteria set 
forth in Rules 4.10(h) and (i), respectively, and that non-U.S. 
component securities that are not subject to comprehensive surveillance 
agreements do not, in the aggregate, represent more than 25% of the 
weight of the MXEA Index or 27.5% of the weight of the MXEF Index.\8\
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    \7\ See Rule 8.31(a). The Exchange notes that there are no 
position limits (including no near-term restrictions) for Cboe S&P 
500 a.m./PM Basis, Cboe S&P 500 Three-Month Realized Variance, Cboe 
S&P 500 Three-Month Realized Volatility and on the BXM (1/10th 
value), DJX, OEX, XEO, NDX, RUT, VIX, VXN, VXD, VXST, S&P 500 
Dividend Index, and SPX classes, and while there are position limits 
for the Dow Jones Equity REIT Index, it is not subject to any near-
term restrictions.
    \8\ See Rule 4.10(h)(7).
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Composition and Growth Analysis for Underlying ETFs and Indexes
    As stated above, position (and exercise) limits are intended to 
prevent the establishment of options positions that can be used or 
might create incentives to manipulate the underlying market so as to 
benefit options positions. The Securities and Exchange Commission (the 
``Commission'') has recognized that these limits are designed to 
minimize the potential for mini-manipulations and for corners or 
squeezes of the underlying market, as well as serve to reduce the 
possibility for disruption of the options market itself, especially in 
illiquid classes.\9\ The Underlying ETFs as well as the ETF components 
are highly liquid, and are based on a broad set of highly liquid 
securities and other reference assets, as demonstrated through the 
trading statistics presented in this proposal. Indeed, the Commission 
recognized the liquidity of the securities comprising the underlying 
interest of SPY and permitted no position limits on SPY options from 
2012 through 2018.\10\ Also, the Commission has previously approved no 
position limits for options on certain broad-based security 
indexes.\11\ Similarly, the component securities of the Indexes are 
highly liquid. The Commission has looked to the liquidity of securities 
comprising an index in establishing position limits for cash-settled 
index options.
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    \9\ See Securities Exchange Act Release No. 67672 (August 15, 
2012), 77 FR 50750 (August 22, 2012)(SR-NYSEAmex-2012-29).
    \10\ See Securities Exchange Act Release No. 67937 (September 
27, 2012), 77 FR 60489 (October 3, 2012) (SR-CBOE-2012-091), which 
implemented a pilot program that ran through 2017, during which 
there were no potion limits for options on SPY. See also Securities 
Exchange Act Release No. 83415 (June 12, 2018), 83 FR 28274 (June 
18, 2018) (SR-CBOE-2018-042).
    \11\ See supra note 5.
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    To support the proposed position limit increases, the Exchange 
considered both liquidity of the Underlying ETFs and the component 
securities of the Underlying ETFs and Indexes, as well as the 
availability of economically equivalent products to the overlying 
options and their respective position limits. For instance, some of the 
Underlying ETFs are based upon broad-based indices that underlie cash-
settled options, and therefore the options on the Underlying ETFs are 
economically equivalent to the options on those indices, which have no 
position limits. Other Underlying ETFs are based upon broad-based 
indices that underlie cash-settled options with position limits 
reflecting notional values that are larger than current position limits 
for options on the ETF analogues. For indexes that are tracked by an 
Underlying ETF but on which there are no options listed, the Exchange 
believes, based on the liquidity, depth and breadth of the underlying 
market of the components of the indexes, that each of the indexes 
referenced by the applicable

[[Page 15005]]

ETFs would be considered a broad-based index under the Exchange's 
Rules. Moreover, regarding the Underlying Indexes, the Exchange 
believes that the deep, liquid markets for and market capitalization of 
the component securities underlying such indexes support the proposed 
position limit increases for the options on those indexes. 
Additionally, if in some cases certain position limits are appropriate 
for the options overlying comparable indexes or basket of securities 
that the Underlying ETFs track, or are appropriate for those ETFs that 
track the Underlying Indexes, then those economically equivalent 
position limits should be appropriate for the options overlying the 
Underlying ETFs or Indexes.
    The Exchange has collected the following trading statistics 
regarding shares of and options on the Underlying ETFs, as well as the 
component securities or components underlying the referenced index (as 
applicable):

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                                                                                                      Shares  outstanding  (ETFs)                                     Total market  cap of ETF
              Product                    ADV \12\ (ETF shares)          ADV  (option contracts)                  \13\                   Fund market cap  (USD)            Components \14\
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SPY...............................  70.3 million..................  2.8 million...................  968.7 million.................  312.9 billion................  29.3 trillion.
FXI...............................  26.1 million..................  196,600.......................  106.8 million.................  4.8 billion..................  28.0 trillion.
EFA...............................  25.1 million..................  156,000.......................  928.2 million.................  64.9 billion.................  19.3 trillion.
HYG...............................  20.0 million..................  193,700.......................  216.6 million.................  19.1 billion.................  906.4 billion. \15\
XLF...............................  48.8 million..................  102,100.......................  793.6 million.................  24.6 billion.................  3.8 trillion.
OIH...............................  8.9 million...................  32,500........................  58.3 million..................  770.8 million................  167 billion.
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    The Exchange has also collected similar trading statistics 
regarding options on and the component securities of the Underlying 
Indexes:
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    \12\ Average daily volume (ADV) data for ETF shares and options 
contracts, as well as for options on the Underlying Indexes 
presented below, are for all of 2019. Additionally, reference to ADV 
in ETF shares, ETF options, and index options herein this proposal 
are for all of 2019, unless otherwise indicated
    \13\ Shares Outstanding and Fund Market Capitalization Data were 
sourced from Bloomberg on January 2, 2020.
    \14\ Total Market Capitalization of the ETF Components was 
sourced from Bloomberg on January 3, 2020.
    \15\ Total Market Capitalization of HYG was sourced from IHS 
Markit, which sends daily constituent information to the Exchange.

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                                                           Number of                            Full Market Cap
                                     ADV  (option          component       Index Market cap      of component
             Product                  contracts)          securities       (USD)  (trillion)      securities
                                                           (indexes)                              (trillion)
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MXEF............................               1,055               1,404                 6.2                18.0
MXEA............................                 594                 917                14.9                19.3
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    The Exchange believes that, overall, the liquidity in the shares of 
the Underlying ETFs and in the component securities of the Underlying 
ETFs and Indexes, and in their overlying options, as well as the large 
market capitalizations and structure of each of the Underlying ETFs and 
Indexes, support the proposal to increase the position limits for each 
option class. Given the robust liquidity and capitalization in the 
Underlying ETFs and in the component securities of the Underlying ETFs 
and Indexes the Exchange does not anticipate that the proposed increase 
in position limits would create significant price movements. Also, the 
Exchange believes the market capitalization of the underlying component 
securities of the applicable index or reference asset are large enough 
to adequately absorb potential price movements that may be caused by 
large trades.
    Specifically, the Exchange notes that SPY tracks the performance of 
the S&P 500 Index, which is an index of diversified large cap U.S. 
companies.\16\ It is composed of 505 selected stocks spanning over 
approximately 24 separate industry groups. The S&P 500 is one of the 
most commonly followed equity indices, and is widely considered to be 
the best indicator of stock market performance as a whole. SPY is one 
of the most actively traded ETFs, and, since 2017,\17\ its ADV has 
increased from approximately 64.6 million shares to 70.3 million shares 
by the end of 2019. Similarly, its ADV in options contracts has 
increased from 2.6 million to 2.8 million through 2019.\18\ As noted, 
the demand for options trading on SPY has continued to increase, 
however, the position limits have remained the same, which the Exchange 
believes may have impacted growth in SPY option volume from 2017 
through 2019. The Exchange also notes that SPY shares are more liquid 
than PowerShares QQQ Trust (``QQQ'') shares, which is also currently 
subject to a position limit of 1,800,000 contracts.\19\ Specifically, 
SPY currently experiences over twice the ADV in shares and over four 
times the ADV in options than that of QQQ.\20\
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    \16\ See SPDR S&P 500 ETF Trust, available at https://www.ssga.com/us/en/individual/etfs/funds/spdr-sp-500-etf-trust-spy 
(January 21, 2020).
    \17\ See Securities Exchange Release No. 81483 (August 25, 
2017), 82 FR 41457 (August 31, 2017) (Notice of Filing of a Proposed 
Rule Change To Amend Interpretation and Policy .07 of Exchange Rule 
4.11, Position Limits, To Increase the Position Limits for Options 
on Certain ETFs) (SR-CBOE-2017-057). The Exchange notes that the 
statistics for comparisons to 2017 data throughout this proposal 
have been drawn from SR-CBOE-2017-057.
    \18\ See Securities Exchange Act Release No. 83415 (June 12, 
2018), 83 FR 28274 (June 18, 2018) (Notice of Filing and Immediate 
Effectiveness of a Proposed Rule Change To Amend the Position Limit 
for SPY Options) (SR-CBOE-2018-042).
    \19\ The Exchange notes that it also updates the PowerShares QQQ 
Trust symbol in Rule 8.30(a) from QQQQ to QQQ as this accurately 
reflects the current ticker symbol for PowerShares QQQ, which was 
officially changed from QQQQ to QQQ by Invesco PowerShares Capital 
Management LLC in 2011. See Morningstar, PowerShares Changes Ticker 
Symbol of Tech-Heavy QQQ ETF, available at morningstar.com/articles/374713/powershares-changes-ticker-symbol-of-tech-heavy-qqq-etf 
(March 23, 2011).
    \20\ The 2019 AVD for QQQ shares is 30.2 million and for options 
on QQQ is 670,200.
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    EFA tracks the performance of MSCI EAFE Index, which is comprised 
of over 900 large and mid-cap securities across 21 developed markets, 
including countries in Europe, Australia and the Far East, excluding 
the U.S. and

[[Page 15006]]

Canada.\21\ The Exchange notes that from 2017 through 2019, ADV has 
grown significantly in shares of EFA and in options on EFA, from 
approximately 19.4 million shares in 2017 to 25.1 million through 2019, 
and from approximately 98,800 options contract in 2017 to 155,900 
through 2019. The Exchange notes that options are available on the 
MXEA, the analogue index (also subject to a proposed position limit 
increase described in detail below), which is currently subject to a 
position limit of 25,000 contracts (50,000 as proposed). Utilizing the 
notional value comparison of EFA's share price of $69.44 and MXEA's 
index level of 2036.94, approximately 29 EFA option contracts equal one 
MXEA option contract. Based on the above comparison of notional values, 
a position limit for EFA options that would be economically equivalent 
to that of MXEA options equates to 725,000 contracts (currently) and 
1,450,000 (for the proposed 50,000 contracts position limit increase 
for MXEA options). Also, MXEA index options have an ADV of 594 options 
contracts, in which equate to an ADV of 17,226 EFA option contracts (as 
that is 29 times the size of 594). EFA options, which are more actively 
traded and held than MXEA options, are currently subject to a position 
limit of 500,000 options contracts despite their much higher ADV of 
approximately 156,700 options contracts.
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    \21\ See iShares MSCI EAFE ETF, available at https://www.ishares.com/us/products/239623/ishares-msci-eafe-etf (February 
10, 2020).
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    FXI tracks the performance of the FTSE China 50 Index, which is 
composed of the 50 largest Chinese stocks.\22\ FXI shares and options 
have also experienced increased liquidity since 2017, as ADV has grown 
from approximately 15.1 million shares in 2017 to 26.1 million through 
2019, as well as approximately 71,900 options contracts in 2017 to 
196,600 through 2019. Although there are currently no options on the 
FTSE China 50 Index listed for trading,\23\ the components of the FTSE 
China 50 Index, which can be used to create a basket of stocks that 
equate to the FXI ETF, currently have a market capitalization of 
approximately $28 trillion and FXI has a market capitalization of $4.8 
billion (as indicated above), which the Exchange believes are both 
large enough to absorb potential price movements caused by a large 
trade in FXI.
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    \22\ See iShares China Large-Cap ETF, available at https://www.ishares.com/us/products/239536/ishares-china-largecap-etf 
(February 10, 2020).
    \23\ The Exchange is authorized to list options on the FTSE 
China 50 Index pursuant to Rule 4.12(l).
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    XLF invests in a wide array of financial service firms with 
diversified business lines ranging from investment management to 
commercial and investment banking. It generally corresponds to the 
price and yield performance of publicly traded equity securities of 
companies in the SPDR Financial Select Sector Index.\24\ XLF 
experiences ADV in shares and in options that is significantly greater 
that the ADV in shares and options for EWZ (26.7 million shares and 
186,500 option contracts), TLT (9.6 million shares and 95,200 options 
contracts), and EWJ (7.2 million shares and 5,700 options contracts), 
each of which already have a position limit of 500,000 contracts--the 
proposed position limit for XLF options. Although there are no options 
listed on the SPDR Financial Select Sector Index listed for trading, 
the components of the index, which can be used to create a basket of 
stocks that equate to the XLF ETF, currently have a market 
capitalization of $3.8 trillion (indicated above). Additionally, XLF 
has a market capitalization of $24.6 billion. The Exchange believes 
that both of these are large enough to absorb potential price movements 
caused by a large trade in XLF.
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    \24\ See Select Sector SPDR ETFs, XLF, available at http://www.sectorspdr.com/sectorspdr/sector/xlf (January 15, 2020).
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    OIH seeks to replicate the price and yield performance of the MVIS 
U.S. Listed Oil Services 25 (``MVOIHTR'') Index, which tracks the 
overall performance of U.S.-listed companies involved in oil services 
to the upstream oil sector, including oil equipment, oil services, or 
oil drilling.\25\ The Exchange notes that the ADV in OIH shares and 
options on OIH is greater than the ADV in EWJ shares (7.2 million 
shares) and options on EWJ (5,700 options contracts), which is 
currently subject to a position limit of 500,000 options contracts--the 
proposed limit for options on OIH. Like that of XLF and FXI above, 
there is currently no index option analogue for OIH approved for 
options trading, however, the components of the MVOIHTR Index, which 
can be used to create the OIH ETF, currently have a market 
capitalization of $167 billion and OIH currently has a market 
capitalization of $770.8 million--sufficient to absorb price movements 
as a result of potentially oversized trades. Moreover, OIH is used to 
hedge the oil market, which includes approximately $200 billion of open 
interest in U.S. futures as of January 2020, thus, potentially 
necessitating substantial hedging capacity.
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    \25\ See VanEck Vectors Oil Services ETF, available at https://www.vaneck.com/etf/equity/oih/overview/ (January 15, 2020).
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    Finally, HYG attempts to track the investment results of Markit 
iBoxx USD Liquid High Yield Index, which is composed of U.S. dollar-
denominated, high-yield corporate bonds and is one of the most widely 
used high-yield bond ETFs.\26\ HYG experiences significantly higher ADV 
in shares and options than both TLT (9.6 million shares and 95,200 
options contracts), and EWJ (7.2 million shares and 5,700 options 
contracts), which are currently subject to a position limit of 500,000 
options contracts--the proposed limit for options on HYG. While HYG 
does not have an index option analogue listed for trading, the Exchange 
believes that its market capitalization of $19.1 billion, and of $906.4 
billion in component securities, is adequate to absorb a potential 
price movement that may be caused by large trades in HYG.
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    \26\ See iShares iBoxx $ High Yield Corporate Bond ETF, 
available at https://www.ishares.com/us/products/239565/ishares-iboxx-high-yield-corporate-bond-etf (January 15, 2020).
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    Also, as demonstrated by the table above, the components of the 
Underlying Indexes similarly experience relatively high liquidity and 
market capitalization. As stated above, MXEA consists of large and mid-
cap components across 21 developed countries. The market capitalization 
of the MXEA components (separately and in the aggregate) has increased 
significantly since the initial listing of MXEA options on the Exchange 
in 2016--from approximately $11.4 trillion to $14.9 trillion in the 
aggregate by the end of 2019, and from approximately $12.3 billion in 
2016 to $16.3 billion on average per component by the end of 2019. The 
Exchange also notes that the average market capitalization of the 
component securities unadjusted for inclusion in MXEA is currently 
around $20 billion.
    The MXEF is an equity index designed to capture large and mid-cap 
representation across 26 emerging market countries, also covering 
approximately 85% of the free float-adjusted market capitalization in 
each country.\27\ The market capitalization of the components of MXEF 
in the aggregate has also grown significantly since the initial listing 
of MXEF options on the Exchange in 2016--from approximately $3.2 
trillion in 2016 to $6.2 trillion by the end of 2019.

[[Page 15007]]

Additionally, the average market capitalization per constituent has 
risen from approximately $3.8 billion in 2016 to approximately $4.4 
billion in 2019. Like MXEA, the Exchange notes that the average market 
capitalization of the component securities unadjusted for inclusion in 
the index is approximately $12.9 billion. The Exchange also notes that 
MXEF has experienced a continuous rise in the overall number of its 
component securities, which has recently climbed to 1,401 component 
securities in 2019 compared to 834 in 2016 when initially listed.
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    \27\ See MSCI Emerging Markets Index fact sheet (dated December 
31, 2019), available at: https://www.msci.com/documents/10199/c0db0a48-01f2-4ba9-ad01-226fd5678111.
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    The Exchange further notes that the ETFs that track MXEF (EEM) and 
MXEA (EFA, described in detail above) are currently subject to 
significantly larger notionally adjusted position limits--1,000,000 
contracts (as proposed for EFA)--yet these products are essentially 
comprised of and impacted by the same underlying component securities. 
In addition to this, the Underlying Indexes are designed to change over 
time as various regions and entities emerge and mature, and, as a 
result of the growth of the markets represented, the Underlying Indexes 
have each experienced continued expansion. As a result, the Exchange 
has observed increasing demand for trading in options and other 
derivatives on the Underlying Indexes, which the Exchange believes 
necessitates the proposed position limit increases and elimination of 
near-term position limit restrictions. In light of the continued 
expansion and increased demand for options on MXEF and MXEA, the 
Exchange believes that implementing the same overall limits by 
eliminating near-term limits would mitigate any potential impact on 
using options effectively for portfolio hedging--particularly because 
options on MEXF and MXEA offer investors the opportunity to manage 
global equity exposure, mitigate portfolio risk, and generate 
additional options premium income.\28\ Further, the Exchange believes 
that the expanded limits and the elimination of near-term limit 
restrictions are necessary to help its options market to compete 
against the futures markets. Futures positions that are deemed bona 
fide hedging transactions are exempt from position limit rules under 
the Commodity Exchange Act and its implementing regulations.\29\ Thus, 
institutions may offset much larger equity positions using index 
futures products than by using index options. Therefore, the Exchange 
believes that increasing the position limits and eliminating near-term 
restrictions for options on the Underlying Indexes will help the 
Exchange maintain competitive equality with the future markets.
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    \28\ See e.g. Cboe Global Markets, MSCI Index Options, Manage 
Global Equity Exposure, available at http://www.cboe.com/products/stock-index-options-spx-rut-msci-ftse/cboe-options-on-msci-indexes 
(February 24, 2020).
    \29\ See 7 U.S.C. 6a(3); 17 CFR 1.3(z) and 1.47.
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Creation and Redemption for ETFs
    The Exchange believes that the creation and redemption process for 
ETFs will lessen the potential for manipulative activity with options 
on the Underlying ETFs. When an ETF provider wants to create more 
shares, it looks to an Authorized Participant (generally a market maker 
or other large financial institution) to acquire the securities the ETF 
is to hold. For instance, when an ETF is designed to track the 
performance of an index, the Authorized Participant can purchase all 
the constituent securities in the exact same weight as the index, then 
deliver those shares to the ETF provider. In exchange, the ETF provider 
gives the Authorized Participant a block of equally valued ETF shares, 
on a one-for-one fair value basis. The price is based on the net asset 
value, not the market value at which the ETF is trading. The creation 
of new ETF units can be conducted during an entire trading day, and is 
not subject to position limits. This process works in reverse where the 
ETF provider seeks to decrease the number of shares that are available 
to trade. The creation and redemption process, therefore, creates a 
direct link to the underlying components of the ETF, and serves to 
mitigate potential price impact of the ETF shares that might otherwise 
result from increased position limits for the ETF options.
    The Exchange understands that the ETF creation and redemption 
process seeks to keep an ETF's share price trading in line with the 
ETF's underlying net asset value. Because an ETF trades like a stock, 
its share price will fluctuate during the trading day, due to simple 
supply and demand. If demand to buy an ETF is high, for instance, the 
ETF's share price might rise above the value of its underlying 
securities. When this happens, the Authorized Participant believes the 
ETF may now be overpriced, so it may buy shares of the component 
securities and then sell ETF shares in the open market (i.e. 
creations). This may drive the ETF's share price back toward the 
underlying net asset value. Likewise, if the ETF share price starts 
trading at a discount to the securities it holds, the Authorized 
Participant can buy shares of the ETF and redeem them for the 
underlying securities (i.e. redemptions). Buying undervalued ETF shares 
may drive the share price of the ETF back toward fair value. This 
arbitrage process helps to keep an ETF's share price in line with the 
value of its underlying portfolio.
Surveillance and Reporting Requirements
    The Exchange believes that increasing the position limits for the 
options on the Underlying ETFs and Indexes would lead to a more liquid 
and competitive market environment for these options, which will 
benefit customers interested in trading these products. The reporting 
requirement for the options on the Underlying ETFs and Indexes would 
remain unchanged. Thus, the Exchange would still require that each 
Trading Permit Holder (``TPH'') or TPH organization that maintains 
positions in the options on the same side of the market, for its own 
account or for the account of a customer, report certain information to 
the Exchange. This information would include, but would not be limited 
to, the options' positions, whether such positions are hedged and, if 
so, a description of the hedge(s). Market-Makers \30\ (including 
Designated Primary Market-Makers (``DPMs'')) \31\ would continue to be 
exempt from this reporting requirement, however, the Exchange may 
access Market-Maker position information.\32\ Moreover, the Exchange's 
requirement that TPHs file reports with the Exchange for any customer 
who held aggregate large long or short positions on the same side of 
the market of 200 or more options contracts of any single class for the 
previous day will remain at this level for the options subject to this 
proposal and will continue to serve as an important part of the 
Exchange's surveillance efforts.\33\
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    \30\ A Market-Maker ``Trading Permit Holder registered with the 
Exchange pursuant to Rule 3.52 for the purpose of making markets in 
option contracts traded on the Exchange and that has the rights and 
responsibilities set forth in Chapter 5, Section D of the Rules.'' 
See Rule 1.1.
    \31\ A Designated Primary Market-Maker ``is TPH organization 
that is approved by the Exchange to function in allocated securities 
as a Market-Maker (as defined in Rule 8.1) and is subject to the 
obligations under Rule 5.54 or as otherwise provided under the rules 
of the Exchange.'' See Rule 1.1.
    \32\ The Options Clearing Corporation (``OCC'') through the 
Large option Position Reporting (``LOPR'') system acts as a 
centralized service provider for TPH compliance with position 
reporting requirements by collecting data from each TPH or TPH 
organization, consolidating the information, and ultimately 
providing detailed listings of each TPH's report to the Exchange, as 
well as Financial Industry Regulatory Authority, Inc. (``FINRA''), 
acting as its agent pursuant to a regulatory services agreement 
(``RSA'').
    \33\ See Rule 8.43 for reporting requirements.
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    The Exchange believes that the existing surveillance procedures and

[[Page 15008]]

reporting requirements at the Exchange and other SROs are capable of 
properly identifying disruptive and/or manipulative trading activity. 
The Exchange also represents that it has adequate surveillances in 
place to detect potential manipulation, as well as reviews in place to 
identify potential changes in composition of the Underlying ETFs and 
Indexes and continued compliance with the Exchange's listing standards. 
These procedures utilize daily monitoring of market activity via 
automated surveillance techniques to identify unusual activity in both 
options and the underlyings, as applicable.\34\ The Exchange also notes 
that large stock holdings must be disclosed to the Commission by way of 
Schedules 13D or 13G,\35\ which are used to report ownership of stock 
which exceeds 5% of a company's total stock issue and may assist in 
providing information in monitoring for any potential manipulative 
schemes.
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    \34\ The Exchange believes these procedures have been effective 
for the surveillance of trading the options subject to this 
proposal, and will continue to employ them.
    \35\ 17 CFR 240.13d-1.
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    The Exchange believes that the current financial requirements 
imposed by the Exchange and by the Commission adequately address 
concerns regarding potentially large, unhedged positions in the options 
on the Underlying ETFs and Indexes. Current margin and risk-based 
haircut methodologies serve to limit the size of positions maintained 
by any one account by increasing the margin and/or capital that a TPH 
must maintain for a large position held by itself or by its 
customer.\36\ In addition, Rule 15c3-1\37\ imposes a capital charge on 
TPHs to the extent of any margin deficiency resulting from the higher 
margin requirement.
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    \36\ See Rule 10.3 for a description of margin requirements.
    \37\ 17 CFR 240.15c3-1.
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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.\38\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5)\39\ 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) \40\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \38\ 15 U.S.C. 78f(b).
    \39\ 15 U.S.C. 78f(b)(5).
    \40\ Id.
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    The Exchange believes that the proposed increase in position limits 
for options on the Underlying ETFs and Indexes will remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general, protect investors and the public 
interest, because it will provide market participants with the ability 
to more effectively execute their trading and hedging activities. The 
proposed increases will allow market participants to more fully 
implement hedging strategies in related derivative products and to 
further use options to achieve investment strategies (e.g., there are 
Exchange-Traded Products (``ETPs'') that use options on the Underlying 
ETFs or Indexes as part of their investment strategy, and the 
applicable position limits as they stand today may inhibit these ETPs 
in achieving their investment objectives, to the detriment of 
investors). Also, increasing the applicable position limits may allow 
Market-Makers to provide the markets for these options with more 
liquidity in amounts commensurate with increased consumer demand in 
such markets. The proposed position limit increases may also encourage 
other liquidity providers to shift liquidity, as well as encourage 
consumers to shift demand, from over the counter markets onto the 
Exchange, which will enhance the process of price discovery conducted 
on the Exchange through increased order flow.
    In addition, the Exchange believes that the structure of the 
Underlying ETFs and Indexes, the considerable market capitalization of 
the funds, underlying component securities, and/or indexed component 
securities, and the liquidity of the markets for the applicable options 
and underlying component securities will mitigate concerns regarding 
potential manipulation of the products and/or disruption of the 
underlying markets upon increasing the relevant position limits. As a 
general principle, increases in market capitalizations, active trading 
volume, and deep liquidity of securities do not lead to manipulation 
and/or disruption. This general principle applies to the [sic] Given 
the recently observed increased levels of market capitalization, 
trading volume, and liquidity in shares of the Underlying ETFs, and the 
components of the Underlying ETFs and Indexes (as described above), the 
Exchange does not believe that the options markets or underlying 
markets would become susceptible to manipulation and/or disruption as a 
result of the proposed position limit increases. Indeed, the Commission 
has previously expressed the belief that removing position and exercise 
limits may bring additional depth and liquidity to the options markets 
without increasing concerns regarding intermarket manipulation or 
disruption of the options or the underlying securities.\41\
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    \41\ See Securities Exchange Act Release No. 62147 (October 28, 
2005) (SR-CBOE-2005-41), at 62149.
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    Further, the Exchange notes that the proposed rule change to 
increase position limits for select actively traded options, is not 
novel and has been previously approved by the Commission. For example, 
the Commission has previously approved, on a pilot basis, eliminating 
position limits for options on SPY.\42\ Additionally, the Commission 
has approved similar proposed rule changes by the Exchange to increase 
position limits for options on highly liquid, actively traded ETFs,\43\ 
and has approved similar proposals to eliminate position limits 
(including near-term restrictions) for options overlaying SPX, S&P 100 
Index (``OEX''), European-style S&P 100 Index (``XEO''), Dow Jones 
Industrial Average (``DJI''), and Nasdaq 100 Index (``NDX''), and 
Russell 2000 Index (``RUT''), among others.\44\ In approving the 
permanent elimination of position (and exercise limits) for such 
options, the Commission relied heavily upon the Exchange's surveillance 
capabilities, expressing trust in the enhanced surveillances and 
reporting safeguards that the Exchange took in order to detect and 
deter possible manipulative behavior which might arise from eliminating 
position and

[[Page 15009]]

exercise limits. Furthermore, the Exchange again notes that that the 
proposed position limits for options on EFA and FXI are consistent with 
existing position limits for options on IWM and EEM, the proposed 
limits for options on XLF, HYG, and OIH are consistent with current 
position limits for options on EWZ, TLT, and EWJ, and the proposed 
position limits for MXEA and MXEF are equal to the current position 
limits for options on 20 other indexes, and the proposed elimination of 
near-term restrictions currently exists for options on other 
indexes.\45\
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    \42\ See supra notes 7 and 8.
    \43\ See supra note 16; see also Securities Exchange Act Release 
No. 68086 (October 23, 2012), 77 FR 65600 (October 29, 2012)(SR-
CBOE-2012-066).
    \44\ See Securities Exchange Act Release Nos. 44994 (October 26, 
2001), 66 FR 55722 (November 2, 2001)(SR-CBOE-2001-22); 4556 (July 
16, 2001), 66 FR 38046 (July 20, 2001) (SR-CBOE-2001-39); 52650 
(October 21, 2005), 70 FR 62147 (October 28, 2005)(SR-CBOE-2005-41); 
56350 (September 4, 2007), 72 FR 51878 (September 11, 2001)(SR-CBOE-
2007-79); see also supra note 5.
    \45\ See supra note 5.
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    The Exchange's surveillance and reporting safeguards continue to be 
designed to deter and detect possible manipulative behavior that might 
arise from increasing or eliminating position and exercise limits in 
certain classes. The Exchange believes that the current financial 
requirements imposed by the Exchange and by the Commission adequately 
address concerns regarding potentially large, unhedged position in the 
options on the Underlying ETFs and Indexes, further promoting just and 
equitable principles of trading, the maintenance of a fair and orderly 
market, and the protection of investors.

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 the proposed rule change will impose any burden on intramarket 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act because the increased position limits (and exercise 
limits) will be available to all market participants and apply to each 
in the same manner. The Exchange believes that the proposed rule change 
will provide additional opportunities for market participants to more 
efficiently achieve their investment and trading objectives of market 
participants.
    The Exchange does not believe that the proposed rule change will 
impose any burden on intermarket competition that is not necessary or 
appropriate in furtherance of the Act. On the contrary, the Exchange 
believes the proposal promotes competition because it may attract 
additional order flow from the OTC market to exchanges, which would in 
turn compete amongst each other for those orders.\46\ The Exchange 
believes market participants would benefit from being able to trade 
options with increased position limits in an exchange environment in 
several ways, including but not limited to the following: (1) enhanced 
efficiency in initiating and closing out position; (2) increased market 
transparency; and (3) heightened contra-party creditworthiness due to 
the role of OCC as issuer and guarantor. The Exchange understands that 
other options exchanges intend to file similar proposed rule changes 
with the Commission to increase position limits on options on the 
Underlying ETFs. This may further contribute to fair competition among 
exchanges for multiply listed options.
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    \46\ Additionally, several other options exchange have the same 
position limits as the Exchange, as they incorporate by reference to 
the Exchange's position limits, and as a result the position limits 
for options on the Underlying ETFs and Indexes will increase at 
those exchanges. For example, Nasdaq Options position limits are 
determined by the position limits established by the Exchange. See 
Nasdaq Stock Market LLC Rules, Options 9, Sec. 13 (Position Limits).
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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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    A. By order approve or disapprove such proposed rule change, or
    B. institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-CBOE-2020-015 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-2020-015. 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-CBOE-2020-015, and should be submitted 
on or before April 6, 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).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-05236 Filed 3-13-20; 8:45 am]
 BILLING CODE 8011-01-P


