[Federal Register Volume 86, Number 47 (Friday, March 12, 2021)]
[Notices]
[Pages 14166-14169]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-05131]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91275; File No. SR-CBOE-2021-013]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change To Amend Rule 5.52(d) in Connection 
With a Market-Maker's Electronic Volume Transacted on the Exchange

 March 8, 2021.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on February 22, 2021, Cboe Exchange, Inc. (the ``Exchange'' or 
``Cboe Options'') filed with the Securities and Exchange Commission 
(the ``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 
to amend Rule 5.52(d) in connection with a Market-Maker's electronic 
volume transacted on the Exchange. 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
    The Exchange proposes to amend Rule 5.52(d) in connection with a 
Market-Maker's electronic volume transacted on the Exchange. Rule 
5.52(d)(1) provides that if a Market-Maker never trades more than 20% 
of the Market-Maker's contract volume electronically in an appointed 
class during any calendar quarter (``Electronic Volume Threshold''),\3\ 
a Market-Maker will not be obligated to quote electronically in any 
designated percentage of series within that class pursuant to 
subparagraph (d)(2) (which governs the continuous electronic quoting 
requirements for Market-Makers in their appointed classes). That is, 
once a Market-Maker surpasses the Electronic Volume Threshold in an 
appointed class, the Market-Maker is required to provide continuous 
electronic quotes in that appointed classes going forward. Neither Rule 
5.52(d)(1) nor (d)(2) permit a Market-Maker to reduce its electronic 
volume after surpassing the Electronic Volume Threshold in order to 
reset the electronic volume trigger or otherwise undo the resulting 
obligation to stream electronic quotes once the Electronic Volume 
Threshold is triggered in an appointed class.
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    \3\ The proposed rule change provides additional clarity within 
Rule 5.52(d)(1) by defining this threshold and adding the defined 
term throughout Rule 5.52(d)(1).
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    Market-Makers accustomed to executing volume on the trading floor 
have sophisticated and complicated risk modeling associated with their 
floor trading activity, including quoting, monitoring, and responding 
to the trading crowd. However, the Exchange understands that while such 
Market-Makers do have separate systems or third-party platforms for 
quoting, monitoring and responding to electronic markets, because these 
Market-Makers are almost exclusively floor-based, their technology or 
other platforms enabling them to quote electronically do not achieve 
the level of sophistication or complexity as the systems used by 
Market-Makers accustomed to quoting electronically. Indeed, to satisfy 
the continuous electronic quoting requirements, a Market-Maker must 
provide continuous bids and offers for 90% of the time the Market-Maker 
is required to provide electronic quotes in an appointed option class 
on a given trading day and must provide continuous quotes in 60% of the 
series

[[Page 14167]]

of the Market-Maker's appointed classes. The Exchange determines 
compliance by a Market-Maker with this quoting obligation on a monthly 
basis. In addition to this, a Market-Maker must, among other things, 
compete with other Market-Makers in its appointed classes, update 
quotations in response to changed market conditions in its appointed 
classes, maintain active markets in its appointed classes, and, 
overall, engage in a course of dealings reasonably calculated to 
contribute to the maintenance of a fair and orderly market. Market-
Makers that are predominantly floor-based generally do not have the 
technology or electronic trading sophistication to fully satisfy the 
continuous electronic quoting obligations, as well as other heightened 
standards required of a Market-Maker in its appointed classes 
electronically, once the Electronic Volume Threshold is triggered.
    The Exchange has observed that, around the end of calendar year 
2019, particularly given the significant increase in market volatility 
and unpredictability of market conditions in the months leading up to 
and during the COVID-19 pandemic,\4\ Market-Makers that almost 
exclusively executed their volume in open outcry and had not prior 
triggered an electronic quoting obligation pursuant to Rule 5.52(d)(2), 
incidentally breached the Electronic Volume Threshold in certain 
appointed classes and were thereby obliged to provide continuous 
electronic quotes in those classes going forward. As stated above, once 
a Market-Maker surpasses the Electronic Volume Threshold in an 
appointed class, and the electronic quoting obligation is triggered, 
Rules 5.52(d)(1) and (d)(2) do not permit a Market-Maker to reset the 
trigger--a Market-Maker is required to stream electronic quotes in that 
appointed class beginning the next calendar quarter and from there on 
out. As such, once the Electronic Volume Threshold was surpassed by 
Market-Makers accustomed to quoting on the trading floor, these Market-
Makers had to be equipped to uphold continuous electronic quoting 
obligations by just the next calendar quarter, production of which was 
exacerbated by the volatile and unusual market conditions present in 
the markets over the past year. As a result, the Exchange has observed 
that at least one Market-Maker \5\ has been unable to successfully 
fulfill its new continuous electronic quoting obligations in subsequent 
months. The Exchange understands this is due to the Market-Maker not 
having the appropriate technology to successfully provide continuous 
electronic quotes. The Exchange believes requiring a Market-Maker not 
accustomed to and lacking the appropriate technology to provide 
continuous electronic quotes may potentially pose risk to the 
maintenance of fair and order markets as well as risk to the Market-
Makers themselves as they are not able to compete in the electronic 
markets. Also, given the ongoing impact of the COVID-19 pandemic, the 
Exchange believes that additional floor-based Market-Makers may be 
susceptible to incidentally breaching the Electronic Volume Threshold 
in subsequent calendar quarters.
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    \4\ The Exchange notes that after volatility and unusual market 
conditions beginning at the end of 2019 and continuously increasing 
through 2020 as a result of the impact of COVID19 and related 
factors, some market participants may have experienced significant 
trading losses, resulting in their limiting their trading behavior 
and risk exposure. The Exchange understands that firms, not 
otherwise highly active in the electronic markets, may have executed 
electronically in order to close positions, reduce exposure, and 
otherwise mitigate losses and reduce risk in light of market 
conditions experienced at various points throughout the year. These 
firms may have also reduced open outcry activity as part of the same 
risk-reducing strategy, resulting in a coincidental change in the 
mix of electronic versus open outcry volume for such generally 
floor-based Market-Makers.
    \5\ The Exchange is aware of at least two Market-Makers that 
triggered the Electronic Volume Threshold in the last months of 2019 
and were subsequently unable to satisfy the continuous electronic 
quoting obligations. One such Market-Maker had been registered as a 
Market-Maker on the Exchange since 1997 (however, such firm has 
recently been dissolved) and one has been registered as a Market-
Maker on the Exchange since 2001. The Exchange also notes that there 
are other Market-Makers that are not currently subject to the 
continuous electronic quoting requirements in their appointed 
classes. For example, the Exchange is aware of at least three 
Market-Makers that are not currently obligated to provide continuous 
electronic quotes in SPX.
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    Therefore, the Exchange proposes to amend Rule 5.52(d)(1) in a 
manner that provides a potential path of recourse for Market-Makers 
that incidentally exceed the Electronic Volume Threshold, due, for 
example, to extraordinary or extreme volatility as experienced in the 
markets in the last year, but that may not be able to satisfy the 
continuous electronic quoting requirement on a monthly basis going 
forward given their primarily floor-based operation. Specifically, the 
proposed rule change adopts Rule 5.52(d)(1)(B) \6\ which provides that 
the Exchange may, in exceptional cases and where good cause is shown, 
grant a Market-Maker a reset of the Electronic Volume Threshold in 
subparagraph (d)(1)(A). If a Market-Maker trades more than 20% of the 
Market-Maker's contract volume electronically in an appointed class 
during a calendar quarter, the Market-Maker may submit to the Exchange 
a request that the Exchange consider a reset of the Electronic Volume 
Threshold in the appointed class. If the Exchange determines that a 
Market-Maker qualifies for a reset of the 20% threshold in an appointed 
class, then the Market-Maker will not become subject to the continuous 
electronic quoting requirements pursuant to subparagraph (d)(2) in the 
appointed class in the next calendar quarter, and will again become 
subject to subparagraph (d)(1)(A) in the appointed class. In order to 
determine if a Market-Maker qualifies for a reset of the Electronic 
Volume Threshold in an appointed class, the Exchange may consider: (i) 
A Market-Maker's trading activity and business model in the appointed 
class; (ii) any previous requests for a reset of the Electronic Volume 
Threshold in the appointed class, including previously granted 
requests; (iii) market conditions and general trading activity in the 
appointed class; and (iv) any other factors as the Exchange deems 
appropriate in determining whether to approve a Market-Maker's request 
for an Electronic Volume Threshold reset. In this way, the proposed 
rule change allows those Market-Makers that predominantly provide 
liquidity on the trading floor and incidentally surpass (or have 
incidentally surpassed) the electronic volume threshold, and, 
subsequently, are not able to satisfy the continuous electronic quoting 
requirement on a monthly basis going forward, an opportunity to submit 
a request to the Exchange that they again be subject only to open 
outcry quoting requirements and continue to focus on providing 
liquidity in open outcry in accordance with their business models.\7\ 
The Exchange notes that many of its rules currently allow it to make 
similar determinations regarding Market-Maker requirements and 
obligations. Rule 5.52(d)(2) similarly permits the

[[Page 14168]]

Exchange to consider exceptions to a Market-Maker's continuous 
electronic quoting obligation based on demonstrated legal or regulatory 
requirements or other mitigating circumstances. Rule 3.53(b) permits 
the Exchange to determine the appropriate number of Designated Primary 
Market-Makers (``DPMs'') by considering factors such as trading 
experience, history of an applicant's adherence to Exchange Rules, and 
Rules 3.53(g)(3), 3.55(a)(2), and 5.50(h) permit the Exchange to 
authorize a Market-Maker to operate as an On-Floor DPM or an On-Floor 
Lead Market-Maker (``LMM''), or to appoint a class to a DPM, 
respectively, by considering factors such as performance, volume, 
capacity, operational factors, and experience. Like the factors listed 
in proposed Rule 5.52(d)(1), where the Exchange may consider any other 
factors as the Exchange deems appropriate, the factors for Exchange 
consideration listed in Rules 5.52(d)(2), 3.53(b) and (g)(3), 
3.55(a)(2) and 5.50(h) are also not limited and non-exhaustive.
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    \6\ The proposed rule change also updates the format of Rule 
5.51(d)(1) by adopting the title ``Electronic Volume Threshold'' and 
Rule 5.51(d)(1)(A) to govern the provision under current Rule 
5.51(d)(1), and adopts the title ``Continuous Electronic Quotes'' 
for Rule 5.52(d)(2).
    \7\ The Exchange notes that the proposed rule change does not 
preclude the application of Rule 13.15(g)(14)(A), which, as part of 
the Minor Rule Violation Plan (``MRVP''), allows the Exchange to 
impose a fine on Market-Makers for failure to meet their continuous 
quoting obligations, including on any Market-Maker that is able to 
``reset'' upon Commission approval of this proposal. The Exchange 
additionally notes that the proposed rule change also does not 
preclude the Exchange from referring matters covered under the MRVP 
for formal disciplinary action, pursuant to Rule 13.15(f), whenever 
it determines that any violation is intentional, egregious or 
otherwise not minor in nature.
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    Overall, the Exchange believes the propose rule change provides an 
opportunity for Market-Makers that are accustomed to providing 
liquidity on the trading floor, that incidentally may breach the 
Electronic Volume Threshold, to appeal to the Exchange to allow them, 
if good cause is shown, not to be subject to the continuous electronic 
quoting requirements and, instead, to continue to focus on providing 
liquid markets in open outcry in accordance with their business models. 
As such, the proposed rule change is designed to maintain fair and 
orderly markets, in that, if so determined appropriate by the Exchange, 
an Electronic Volume Threshold reset reduces the likelihood that 
Market-Makers not equipped to compete and stream quotes in the 
electronic markets at competitive prices, because their business models 
apply primarily to open outcry trading, are not compelled to attempt do 
so. The Exchange believes that automatically imposing continuous 
electronic quoting obligations on such Market-Makers without potential 
recourse may result in their inability to consistently stream 
electronic quotes on a monthly basis going forward and to comply with 
their other Market-Maker responsibilities, including engaging in a 
course of dealings that must be reasonably calculated to contribute to 
the maintenance of a fair and orderly market, refraining from making 
bids or offers that are inconsistent with such course of dealings, and 
updating quotations in response to changed market conditions. The 
proposed rule change instead allows the Exchange to consider whether 
those Market-Makers may continue to provide liquid markets on the 
Exchange's trading floor without having to quote electronically.
    Finally, the proposed rule change also removes the rollout period 
for new classes in Rule 5.52(d)(1), which currently provides that for a 
period of 90 days commencing immediately after a class begins trading 
on the System, this subparagraph (d)(1) governs trading in that class. 
The rollout period was implemented in connection with the transition of 
certain classes to the Exchange's former Hybrid System.\8\ As of 2018, 
all classes listed for trading on the Exchange now trade on the same 
platform, the Exchange's System. Therefore, a rollout period is no 
longer necessary. All Market-Makers in new classes and likewise all new 
Market-Makers will be equally subject to the electronic volume 
threshold pursuant to Rule 5.52(d)(1) and (d)(2) upon starting out.
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    \8\ See Securities Exchange Act Release No. 47959 (May 30, 
2003), 68 FR 34441 (June 9, 2003) (SR-CBOE-2002-05).
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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.\9\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \10\ 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) \11\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
    \11\ Id.
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    In particular, the proposed rule change is consistent with the Act 
in that it removes impediments to and perfects the mechanism of a free 
and open market and in general protects investors by allowing Market-
Makers accustomed to quoting on the trading floor and, therefore, not 
readily equipped to successfully stream electronic quotes on a 
continuous basis going forward, to appeal to the Exchange for a reset 
of the Electronic Volume Threshold if such Market-Makers incidentally 
breach the threshold. As described above, the Exchange understands that 
certain Market-Makers who primarily operate on the trading floor do not 
support systems with the level of sophistication and complexity that 
would allow them to compete in the electronic markets or satisfy the 
continuous electronic quoting obligations month-to-month pursuant to 
the Exchange Rules. The Exchange also believes the proposed rule change 
will remove impediments to and perfect the mechanism of a free and open 
market, as it will permit it to remove a potentially undue burden on 
floor-based Market-Makers, which the Exchange believes may help 
preserve the presence of such Market-Makers that provide key liquidity 
to the Exchange's trading floor, which benefits all investors. 
Therefore, the Exchange believes the proposed rule change to allow a 
Market-Maker to request that the Exchange consider a reset of the 
Electronic Volume Threshold will assist in the maintenance of a fair 
and orderly market, and the protection of investors generally, by 
providing a potential path of recourse to Market Makers that 
predominantly provide liquidity to the Exchange's trading floor but may 
incidentally breach the Electronic Volume Threshold due, for example, 
to high volatility or unusual market conditions. Like other Exchange 
Rules governing Market-Maker requirements and obligations, the Exchange 
may consider a non-exhaustive list of factors in determining whether to 
grant a reset. The Exchange believes that an opportunity for a Market-
Maker to appeal to the Exchange to potentially receive a reset of the 
Electronic Volume Threshold may reduce the likelihood that Market-
Makers without sufficient equipment to stream competitive electronic 
quotes on an ongoing basis that may incidentally trigger the electronic 
volume threshold, especially in light of market volatility and unusual 
market conditions that continue to arise as a result of the ongoing 
COVID-19 pandemic, are not necessarily required to do so. This way, 
such Market-Makers may, if determined appropriate by the Exchange, 
continue to focus on providing liquidity on the trading floor in 
accordance with their operations and satisfy their obligation to engage 
in a

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course of dealings reasonably calculated to contribute to the 
maintenance of a fair and orderly market and their other Market-Maker 
obligations. Therefore, the Exchange also believes the proposed rule 
change furthers the objectives of Section 6(c)(3) of the Act,\12\ which 
authorizes the Exchange to, among other things, prescribe standards of 
financial responsibility or operational capability and standards of 
training, experience and competence for its Trading Permit Holders and 
person associated with Trading Permit Holders. The Exchange believes 
that the proposed rule change will generally protect investors as it is 
designed to support the overall purpose of the rule in permitting open 
outcry Market-Makers to continue to conduct their business as 
intended--providing liquid markets on the Exchange's trading floor 
without having to quote electronically.
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    \12\ 15 U.S.C. 78f(c)(3).
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    Finally, the Exchange believes that the proposed rule change to 
remove the rollout provision for new classes will remove impediments to 
and perfect the mechanism of a free and open market and national market 
system because it removes a provision that is no longer necessary as a 
result of the full transition of all classes listed on the Exchange to 
trading on the Exchange's System. All Market-Makers in new classes, and 
likewise all new Market-Makers, will continue to have the opportunity 
to acclimate to their market making obligations in newly appointed 
classes as they will be equally subject to the electronic volume 
threshold pursuant to Rule 5.52(d)(1) and (d)(2) upon starting out.

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 will impose any burden on 
intramarket competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, because the proposed rule 
change will apply in the same manner to all Market-Makers, in that, all 
Market-Makers that incidentally reach (or have incidentally reached) 
the Electronic Volume Threshold will have the opportunity to request 
that Exchange consider a reset of the threshold. In addition to this, 
the proposed deletion of the new class rollout period would not impose 
any burden on competition as it merely removes a rollout period related 
to the Exchange's prior transition of classes to its former Hybrid 
System that is no longer necessary. All new classes and all new Market-
Makers will be equally subject to the electronic volume threshold 
pursuant to Rule 5.52(d)(1) and (d)(2) upon starting out.
    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 purposes of the Act because the 
Electronic Volume Threshold applies only for the purposes of 
determining when a Market-Maker is subject to certain quoting 
obligations on the Exchange.

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-2021-013 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-2021-013. 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-2021-013 and should be submitted on 
or before April 2, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-05131 Filed 3-11-21; 8:45 am]
BILLING CODE 8011-01-P


