Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Sponsored Access
Federal Register, Volume 80 Issue 225 (Monday, November 23, 2015)
Federal Register Volume 80, Number 225 (Monday, November 23, 2015)
Notices
Pages 73006-73009
From the Federal Register Online via the Government Publishing Office www.gpo.gov
FR Doc No: 2015-29709
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SECURITIES AND EXCHANGE COMMISSION
Release No. 34-76454; File No. SR-BX-2015-067
Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Sponsored Access
November 17, 2015.
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 November 4, 2015, NASDAQ OMX BX, Inc. (``BX'' or ``Exchange'') filed with the Securities and Exchange Commission (``SEC'' or ``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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Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
The Exchange proposes to amend BX Rule 4615 entitled, ``Sponsored Participants'' to: (1) Define the term ``Sponsored Access'' and ``Customer Agreement;'' (2) specify the requirements to comply with Rule 15c3-5 under the Securities Exchange Act of 1934 (``Market Access Rule''); and (3) remove the requirement that each Sponsored Participant and each Sponsoring Member must enter into certain agreements with the Exchange.
The text of the proposed rule change is available on the Exchange's Web site at http://nasdaqomxbx.cchwallstreet.com, at the principal office of the Exchange, and at the Commission's Public Reference Room.
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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.
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Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
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Purpose
The purpose of the filing is to amend BX Rule 4615 entitled, ``Sponsored Participants'' to: (1) Define the term ``Sponsored Access,'' and specifically stating that compliance with the Market Access Rule is required, and defining ``Customer Agreement'' to refer to the agreement that must be executed between the Sponsoring Participant and the Sponsoring Member; (2) specify the requirements to comply with the Market Access Rule; and (3) remove the requirement that each Sponsored Participant and each Sponsoring Member must enter into certain agreements with the Exchange to streamline its rule and remove unnecessarily burdensome notice requirements to the Exchange.
Defining Sponsored Access
A Sponsored Participant may be a member or a non-member of the Exchange, such as an institutional investor, that gains access to the Exchange \3\ and trades under a Sponsoring Member's execution and clearing identity pursuant to sponsorship arrangements currently set forth in BX Rule 4615. The Exchange is proposing to define the term ``Sponsored Access'' to clarify the type of market access arrangement that is subject to BX Rule 4615. The Exchange proposes to amend BX Rule 4615(a) to add the following definition, ``Sponsored Access shall mean an arrangement whereby a member permits its customers to enter orders into the Exchange's System that bypass the member's trading system and are routed directly to the Exchange, including routing through a service bureau or other third party technology provider.'' This definition was derived from the Commission's description of Sponsored Access used in the release approving the Market Access Rule.\4\ The Exchange believes that defining Sponsored Access in BX Rule 4615 will provide market participants with greater clarity concerning Sponsored Access and their obligations with respect to this type of access arrangement.
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\3\ For example, a broker-dealer may allow its customer--whether an institution such as a hedge fund, mutual fund, bank or insurance company, an individual, or another broker-dealer--to use the broker-
dealer's MPID, account or other mechanism or mnemonic used to identify a market participant for the purposes of electronically accessing the Exchange.
\4\ The Market Access Rule, among other things, requires broker-
dealers providing others with access to an exchange or alternative trading system to establish, document, and maintain a system of risk management controls and supervisory procedures reasonably designed to manage the financial, regulatory, and other risks of providing such access. See Securities Exchange Act Release No. 63241 (November 3, 2010), 75 FR 69792 (November 15, 2010).
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Defining Customer Agreement
The Exchange proposes to amend BX Rule 4615(b)(i) to define the agreement that Sponsored Participants must enter into and maintain with one or more Sponsoring Members to establish proper relationship(s) and account(s) through which the Sponsored Participant may trade on the BX Market, as a ``Customer Agreement.''
Market Access Rule
Pursuant to BX Rule 4615, the Sponsoring Member is responsible for the activities of the Sponsored Participant. Sponsored Participants are required to have procedures in place to comply with Exchange rules, and the Sponsoring Member takes responsibility for the Sponsored Participant's activity on the Exchange. Members may have multiple Sponsored Access relationships in place at a given time. The Exchange's examination program assesses compliance with BX Rule 4615, among other rules.\5\ The Exchange proposes to specifically enumerate within BX Rule 4615 the member's obligation to comply with the Market Access Rule, which members are currently required to comply with respecting market access. The Exchange believes that specifying the obligation to comply with the Market Access Rule specifically will reinforce that BX Rule 4615 presupposes member compliance with the Market Access Rule.
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\5\ The Exchange has a Regulatory Services Agreement with Financial Industry Regulatory Authority (``FINRA'') to conduct regulatory examinations, among other obligations.
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Elimination of Certain Contract Requirements
At this time, the Exchange proposes to remove requirements to submit certain forms to the Exchange. There are three forms that are currently required by BX Rule 4615: (1) An agreement between the Sponsored Participant and the Exchange (``Exchange Agreement''); (2) a
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User Agreement between the Sponsored Participant and its Sponsoring Member that is provided to the Exchange; and (3) a Notice of Consent provided to the Exchange by the Sponsoring Member. BX Rule 4615 will continue to require that each Sponsored Participants enter into a Customer Agreement with each Sponsoring member to establish proper relationship(s) and account(s) through which the Sponsored Participant may trade on the BX Market. These Customer Agreement(s) must incorporate the Sponsorship Provisions set forth in paragraph (ii) in BX Rule 4615.\6\ The Customer Agreement remains unaffected by this rule proposal. Also, the Exchange is proposing to amend BX Rule 4615 to identify the aforementioned agreement as the ``Customer Agreement.''
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\6\ The Customer Agreement is required to include, among other language, all orders entered by the Sponsored Participants and any person acting on behalf of or in the name of such Sponsored Participant and any executions occurring as a result of such orders are binding in all respects on the Sponsoring Member and, also, Sponsoring Member is responsible for any and all actions taken by such Sponsored Participant and any person acting on behalf of or in the name of such Sponsored Participant.
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Today, only members may request connectivity to the Exchange. A member may obtain one or more ports for the purpose of providing Sponsored Access. If separate ports are requested by a member for the purpose of providing Sponsored Access, the member must request those ports from the Exchange and the member is responsible for the Sponsored Participant's activity on the Exchange. In all circumstances, the Exchange will only permit members to request connectivity to the market and the member is responsible for all customer orders submitted through the member's port.
First, the Exchange believes that completing and submitting the Exchange Agreement, User Agreement and Notice of Consent is unnecessarily burdensome in light of the current structure in place at the Exchange. Only members may request connectivity to the Exchange by contacting BX Subscriber Services. Such connection by the member requires approval by the Exchange for the purpose of testing as well as other relevant information sharing with the Exchange by the member to obtain a port. The Exchange is aware of the member responsible for each of its ports, however the Exchange may not be aware of the member's Sponsored Access arrangements due to varied ways that a member may utilize a port. The Exchange believes the requirement to also complete and submit an Exchange Agreement, User Agreement and Notice of Consent with our BX Membership Department is viewed as unnecessarily burdensome by members because of the multitude of relationships the member has with various customers. Members have expressed to the Exchange that they have multiple relationships with customers, which customer relationships change over time.\7\ Members have indicated that the necessity to continuously disclose the updated customer relationships to the Exchange is burdensome and unnecessary as they remain responsible for all activity conducted on the Exchange through a port assigned to the member. Further such information is available to the Exchange upon Exchange request from its regulatory group.\8\
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\7\ For example, a broker-dealer's customers, which could include hedge funds, institutional investors, individual investors, and other broker-dealers.
\8\ See BX Rule 8210.
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Second, the Exchange believes that the Exchange Agreement between the Sponsored Participant and the Exchange is also unnecessarily burdensome. The requirement to provide this form was intended to give the Exchange notification that such a relationship existed and to ensure that the Sponsored Participant was informed of the Exchange's Certificate of Incorporation, Bylaws, Rules and procedures. The agreements also provided the Exchange with contractual privity, which would no longer exist with the removal of the Exchange Agreement. The Exchange does not believe the loss of privity with the Sponsored Participant creates a concern as the Exchange has the ability to remove access to the port \9\ at any time if the activity of the Sponsored Participant warrants such removal. In addition, as discussed below, the Sponsored Participant will be made aware of its obligations through the Customer Agreement that it executed with the Sponsoring Member. As noted above, the Exchange only permits its members to request connectivity to the Exchange's System and members responsible for all trades submitted through such ports. Pursuant to BX Rule 4615 the trading activity of a Sponsored Participant must be monitored by the Sponsoring Member for compliance with the terms of the Customer Agreement with the Sponsoring Participant.\10\ Finally, the member continues to be obligated to comply with BX Rule 4615 and the Market Access Rule. The Sponsoring Member is responsible for any and all actions taken by such Sponsored Participant and any person acting on behalf of or in the name of such Sponsored Participant.
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\9\ BX Rule 4611, entitled ``NASDAQ OMX BX Market Participant Registration'' permits BX to impose upon any BX Market Maker, BX ECN or Order Entry Firm such temporary restrictions upon the automated entry or updating of orders or Quotes/Orders as BX may determine to be necessary to protect the integrity of BX's systems.
\10\ See BX Rule 4615(b)(ii)(G).
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BX Rule 4615 requires that the Sponsored Participant and the Sponsored Member maintain a Customer Agreement to ensure compliance with the Exchange's Rules and obligations related to security, among other things.\11\ BX Rule 4615 requires that the Customer Agreement specify that the Sponsored Participant shall maintain, keep current and provide to the Sponsoring Member a list of individuals authorized to obtain access to the Exchange on behalf of the Sponsored Participant and provide appropriate training. In addition, pursuant to the Customer Agreement provisions, the Sponsored Participant is required to take reasonable security precautions to prevent unauthorized use or access to the Exchange, including unauthorized entry of information into the Exchange, or the information and data made available therein. Finally, the Customer Agreement must provide that the Sponsored Participant is responsible for any and all orders, trades and other messages and instructions entered, transmitted or received under identifiers, passwords and security codes of authorized individuals, and for the trading and other consequences thereof, including granting unauthorized access to the Exchange. The contents and the requirement for a Customer Agreement are unchanged.
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\11\ See BX Rule 4615(b)(ii)(B).
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Pursuant to BX Rule 4615 the Sponsoring Member must provide a Notice of Consent to the Exchange. The Exchange believes that a Notice of Consent provided to the Exchange by the Sponsoring Member is also unnecessarily burdensome. The Notice of Consent notifies the Exchange of the relationship between the Sponsoring Member and the Sponsored Participant. However, as noted above, the Exchange's regulatory group may request information about a particular customer relationship as it deems necessary. \12\ Further, the Exchange is made aware of the existence of ports when the Sponsoring Member requests connectivity to the Exchange and the Members are responsible for all trading activity by its Sponsored Participant. In addition, the Exchange, through its Regulatory Services Agreement with the
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Financial Industry Regulatory Authority (FINRA), reviews for member compliance with BX Rule 4615 and the Market Access Rule. The Exchange has the ability to remove access to the port \13\ at any time if the activity of the Sponsored Participant would warrant such removal.
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\12\ See BX Rule 8210.
\13\ See note 9.
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In light of the foregoing, the requirement to complete and submit an Exchange Agreement and Notice of Consent with the BX Membership Department is viewed as unnecessarily burdensome by members, who must update their customer relationships internally and provides such information upon Exchange request.
Finally, the Exchange notes it is correcting a capitalization in BX Rule 4615(ii)(C).
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Statutory Basis
The Exchange believes that its proposal is consistent with Section 6(b) of the Act \14\ in general, and furthers the objectives of Section 6(b)(5) of the Act \15\ in particular, in that it is designed to promote just and equitable principles of trade, 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, by enhancing the risk protections available to Exchange members.
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\14\ 15 U.S.C. 78f(b).
\15\ 15 U.S.C. 78f(b)(5).
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Defining Sponsored Access
Adding a definition of Sponsored Access will assist market participants to understand the type of arrangements that are subject to BX Rule 4615 and such clarity will serve to promote just and equitable principles of trade. Members have indicated, and the Exchange believes, that adding the Sponsored Access definition will provide members with additional guidance with respect to BX Rule 4615.
Defining Customer Agreement
Defining the agreement that Sponsored Participants must enter into and maintain with one or more Sponsoring Members to establish proper relationship(s) and account(s) through which the Sponsored Participant may trade on the BX Market, as a ``Customer Agreement'' will also serve to provide members with clarity on the agreement that the Exchange will continue to require and the obligations that are contained within the Customer Agreement. This amendment is non-substantive.
Market Access Rule
Members continue to be required to comply with Rule 4615 and the Market Access Rule. The Exchange believes that specifically enumerating the member's responsibility to comply with the Market Access Rule will provide member's with additional guidance concerning the application of the Rule. This change is non-substantive as members are currently responsible to comply with the Market Access Rule.
Elimination of Certain Contract Requirements
Removing the requirement to submit and complete an Exchange Agreement, User Agreement and Notice of Consent will remove impediments to and perfect the mechanism of a free and open market by removing a burdensome and time-consuming requirement for members. While elimination of the Exchange Agreement requirement will also eliminate the Exchange's contractual privity with the Sponsored Participant, he Exchange notes that any potential concerns to the loss of privity are mitigated by the Exchange's ability to restrict the Sponsored Participant's access to a port \16\ at any time it is warranted by the Sponsored Participant's trading activity. Also, members have indicated that customer relationships must be frequently updated and it is unnecessarily burdensome to continuously update the Exchange with this information that is available upon request. Connectivity to the Exchange is authorized by the Exchange and must be requested by a member of the Exchange. Such connection requires approval by the Exchange, testing and other security features as well as information sharing with the Exchange by the member. In addition, BX Rule 4615 delineates the terms of the required contractual relationship between the Sponsoring Member and the Sponsored Participant in the Customer Agreement, which remains in effect. The Exchange believes that the Notice of Consent is unnecessary as Sponsoring Members must request connectivity to the Exchange as well as enter into a Customer Agreement with the Sponsored Participant. Finally, as is the case with other Exchange Rules, the Exchange examines for compliance with BX Rule 4615 and may request information about any customer relationship which concerns the Exchange.
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\16\ See note 9.
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The requirement to also complete and submit an Exchange Agreement, User Agreement and a Notice of Consent with our BX Membership Department is viewed as unnecessarily burdensome by members, who must update their customer relationships internally.
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Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act for the reasons below.
Defining Sponsored Access
The addition of a definition for Sponsored Access will assist market participants to understand the type of arrangement subject to BX Rule 4615 and such clarity will serve to promote just and equitable principles of trade.
Defining Customer Agreement
Defining the agreement that Sponsored Participants must enter into and maintain with one or more Sponsoring Members to establish proper relationship(s) and account(s) through which the Sponsored Participant may trade on the BX Market, as a ``Customer Agreement'' does not create an undue burden on competition as this amendment is non-substantive and the Exchange believes that providing guidance concerning the type of arrangement subject to BX Rule 4615 will facilitate member compliance and does not unduly burden competition.
Market Access Rule
In addition, the Exchange believes that specifically enumerating the member's obligation to comply with the Market Access Rule does not create an undue burden on competition, but rather reinforces the application of the Rule. This change is non-substantive as members are currently responsible to comply with the Market Access Rule.
Elimination of Certain Contract Requirements
Removing the requirement to complete an Exchange Agreement, User Agreement and Notice of Consent under BX Rule 4615 does not create an undue burden on competition. The Exchange believes that this requirement is unnecessarily burdensome as the Exchange's regulatory group may request information about a particular customer relationship as it deems necessary.\17\ Further, the Exchange is made aware of the existence of ports when the Sponsoring Member requests connectivity to the Exchange and the
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Members are responsible for all trading activity by its Sponsored Participant. In order to obtain connectivity to the Exchange, members are required to contact BX Subscriber Services and request a connection to the market. Such connection requires approval by the Exchange, testing and other security features as well as information sharing with the Exchange by the member. Only members are permitted to request connectivity to the Exchange. The requirement to also complete and submit an Exchange Agreement, User Agreement and a Notice of Consent with our BX Membership Department is viewed as unnecessarily burdensome by members, who must update their customer relationships internally. Additionally, the Exchange examines for compliance with BX Rule 4615 and may request information about any customer relationship which concerns the Exchange.
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\17\ See BX Rule 8210.
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The Sponsoring Member remains responsible for customer activity conducted on the Exchange through the Customer Agreement, among other obligations. Additionally, Sponsored Participants that obtain access to the Exchange's System are required to take reasonable security precautions and prevent unauthorized use or access to the BX Market, including unauthorized entry of information into the BX Market,\18\ pursuant to the Customer Agreement. Further, the Sponsored Participants is responsible to establish adequate procedures and controls that permit it to effectively monitor its employees', agents' and customers' use and access to the BX Market for compliance with the terms of this agreement.\19\ In addition, the Exchange, through its Regulatory Services Agreement with FINRA conducts reviews of members for compliance with BX Rule 4615 and the Market Access Rule. The Exchange has the ability to remove access to the port \20\ at any time if the activity of the Sponsored Participant would warrant such removal. Finally, BX Rule 4615 is currently applicable to all BX members that desire to sponsor access for its customers and applies to trading in all securities on the Exchange.
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\18\ See BX Rule 4615(b)(ii)(G).
\19\ See BX Rule 4615(b)(ii)(H).
\20\ See note 9.
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Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
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Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Because the foregoing proposed rule change does not significantly affect the protection of investors or the public interest; does not impose any significant burden on competition; and by its terms does not become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate, it has become effective pursuant to Section 19(b)(3)(A) \21\ of the Act and Rule 19b-
4(f)(6) thereunder.\22\
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\21\ 15 U.S.C. 78s(b)(3)(A).
\22\ 17 CFR 240.19b-4(f)(6).
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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 should be approved or disapproved.
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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-BX-2015-067 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-BX-2015-067. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission's Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of 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; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-BX-2015-067 and should be submitted on or December 14, 2015.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\23\
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\23\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
FR Doc. 2015-29709 Filed 11-20-15; 8:45 am
BILLING CODE 8011-01-P
