Document ID: SEC-2016-2210-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Depository Trust Co.; Fixed Income Clearing Corp.; National Securities Clearing Corp.
Posted Date: 2016-12-16T05:00Z

[Federal Register Volume 81, Number 242 (Friday, December 16, 2016)]
[Notices]
[Pages 91232-91235]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-30256]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79528; File Nos. SR-DTC-2016-007; SR-FICC-2016-005; SR-
NSCC-2016-003]

Self-Regulatory Organizations; The Depository Trust Company; 
Fixed Income Clearing Corporation; National Securities Clearing 
Corporation; Notice of Filing of Amendments No. 1 and Order Granting 
Accelerated Approval of Proposed Rule Changes, as Modified by 
Amendments No. 1, Relating to Clearing Agency Investment Policy

December 12, 2016.
    On August 25, 2016, The Depository Trust Company (``DTC''), Fixed 
Income Clearing Corporation (``FICC''), and National Securities 
Clearing Corporation (``NSCC,'' and together with DTC and FICC, the 
``Clearing Agencies'') filed with the Securities and Exchange 
Commission (``Commission'') proposed rule changes SR-DTC-2016-007, SR-
FICC-2016-005, and SR-NSCC-2016-003 (``Proposed Rule Changes'') 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ to adopt the Clearing 
Agency Investment Policy, which governs the investment of funds of the 
Clearing Agencies.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The Proposed Rule Changes were published for comment in the Federal 
Register on September 13, 2016.\3\ The Commission did not receive any 
comments on the Proposed Rule Changes. Pursuant to Section 19(b)(2) of 
the Act,\4\ on October 26, 2016, the Commission designated a longer 
period within which to approve the Proposed Rule Changes, disapprove 
the Proposed Rule Changes, or institute proceedings to determine 
whether to approve or disapprove the Proposed Rule Changes.\5\ On 
December 7, 2016, DTC, FICC, and NSCC each filed Amendment No. 1 to 
their respective Proposed Rule Changes (``Amendments No. 1''), as 
discussed below. The Commission is publishing this notice to solicit 
comments on Amendments No. 1 from interested persons and is approving 
on an accelerated basis the Proposed Rule Changes, as modified by 
Amendments No. 1.\6\
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    \3\ See Securities Exchange Act Release No. 78778 (September 7, 
2016), 81 FR 62963 (September 13, 2016) (SR-DTC-2016-007; SR-FICC-
2016-005; SR-NSCC-2016-003).
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 79165 (October 26, 
2016), 81 FR 75865 (November 1, 2016). The Commission designated 
December 12, 2016, as the date by which it should approve, 
disapprove, or institute proceedings to determine whether to approve 
or disapprove the Proposed Rule Changes.
    \6\ Capitalized terms not defined herein are defined in the 
NSCC's Rules & Procedures (``NSCC Rules''), DTC's Rules, By-laws and 
Organizational Certificate (``DTC Rules''), FICC's Mortgage-Backed 
Securities Division Clearing Rules (``MBSD Rules''), or FICC's 
Government Securities Division Rulebook (``GSD Rules''), as 
applicable, available at http://dtcc.com/legal/rules-and-procedures.
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I. Description of the Proposed Rule Changes and Notice of Filing of 
Amendments No. 1

    As described by the Clearing Agencies, the Proposed Rule Changes, 
as modified by Amendments No. 1, would adopt the Clearing Agency 
Investment Policy, which would govern the management, custody, and 
investment of cash deposited to the respective NSCC and FICC Clearing 
Funds and the DTC Participants Fund,\7\ the proprietary liquid net 
assets (cash and cash equivalents) of the Clearing Agencies, and other 
funds held by the Clearing Agencies pursuant to their respective rules. 
Investment of these funds was previously governed by the investment 
policy of The Depository Trust & Clearing Corporation (``DTCC''), which 
is the parent company of the Clearing Agencies.
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    \7\ The NSCC and FICC Clearing Funds, and the DTC Participants 
Fund are described further in the rules of each of the Clearing 
Agencies. See Rule 4 (Clearing Fund) of the NSCC Rules, Rule 4 
(Participants Fund and Participants Investment) of the DTC Rules, 
Rule 4 (Clearing Fund and Loss Allocation) of the GSD Rules and Rule 
4 (Clearing Fund and Loss Allocation) of the MBSD Rules. Supra, note 
6.
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    The Clearing Agency Investment Policy would include, generally, a 
glossary of key terms, the roles and

[[Page 91233]]

responsibilities of DTCC staff in administering the Clearing Agency 
Investment Policy, guiding principles for investments, sources of 
investable funds, allowable investments of those funds, limitations on 
such investments, authority required for those investments, and 
authority required to exceed established investment limits.
    The Clearing Agency Investment Policy would be co-owned by DTCC's 
Treasury group (``Treasury'') \8\ and the Counterparty Credit Risk team 
(``CCR'') within DTCC's Financial Risk Management group.\9\ 
Additionally, the Clearing Agency Investment Policy would be reviewed 
annually and material changes would be required to be approved by the 
Board of Directors of each of NSCC, DTC, and FICC (``Boards''), or such 
other committee to which such authority may be delegated by the Boards 
from time to time. Future changes to the Clearing Agency Investment 
Policy would be subject to a subsequent rule filing and approval by the 
Commission.
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    \8\ Treasury is a part of the DTCC Finance Department and is 
responsible for the safeguarding, investment, and disbursement of 
funds on behalf of the Clearing Agencies and in accordance with the 
principles outlined in the Clearing Agency Investment Policy.
    \9\ Among other responsibilities, DTCC's Financial Risk 
Management group (formerly known as DTCC's Enterprise Risk 
Management group) is generally responsible for the systems and 
processes designed to identify and manage credit, market, and 
liquidity risks to the Clearing Agencies.
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    Treasury would be responsible for identifying potential 
counterparties to investment transactions, establishing and managing 
investment relationships with approved investment counterparties, and 
making and monitoring all investment transactions with respect to the 
Clearing Agencies. Additionally, Treasury would be responsible for 
managing, monitoring, and internal reporting of investment capacity 
utilization relative to established aggregate investment limits.\10\ 
Requests to exceed counterparty limits would be capped at a certain 
percent of the respective limits, as set forth in the Clearing Agency 
Investment Policy.
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    \10\ All investments are subject to limits set by type of 
allowable investment and by counterparty. Investment limits are set 
at an aggregate DTCC-wide level and would apply to investments made 
by any of DTCC and each of its subsidiaries, including each of the 
Clearing Agencies.
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    CCR would be responsible for conducting a credit review of any 
potential counterparty, updating those reviews on a quarterly basis, 
and establishing the investment limit for each counterparty approved by 
CCR. In conducting a credit review, CCR would evaluate the 
creditworthiness of counterparties based on a number of factors, 
including the credit ratings provided by external credit rating 
agencies. Counterparties generally would be required to meet a minimum 
external credit rating set forth in the Clearing Agency Investment 
Policy; however, CCR would be permitted to grant an exception to the 
minimum external credit rating requirement for a particular 
counterparty where CCR concludes that approving exposures to that 
counterparty would serve a valid business or investment purpose of the 
Clearing Agencies and the risk of loss or default to the Clearing 
Agencies is assessed as minimal. CCR could grant such an exception 
based on an assessment of the counterparty's capitalization levels, 
liquidity resources, earnings trends, and any other relevant 
information. The exception would be approved by a Managing Director in 
DTCC's Financial Risk Management group in accordance with the Clearing 
Agency Investment Policy.
    Funds invested pursuant to the Clearing Agency Investment Policy 
would include (i) cash deposits to the respective NSCC and FICC 
Clearing Funds and the DTC Participants Fund, (ii) general corporate 
funds of each of the Clearing Agencies, (iii) NSCC's prefunded default 
liquidity funds raised from the private placement of unsecured 
debt,\11\ (iv) amounts deposited with NSCC by its participants to meet 
Rule 15c3-3, promulgated under the Act as part of its fully-paid-for 
service,\12\ (v) corporate action payments or principal and interest 
payments on Securities credited to the Accounts of DTC Participants 
that are received by DTC too late in the day or missing information 
needed for same-day allocation,\13\ (vi) funds collected from DTC 
Participants through net funds settlement and held by DTC to cover 130 
percent of the market value of ``short positions,'' \14\ and (vii) cash 
debited from Netting Members of FICC's Government Securities Division 
to satisfy such members' mark-to-market deficits on forward settling 
transactions.\15\
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    \11\ See Securities Exchange Act Release No. 75730 (August 19, 
2015), 80 FR 51638 (August 25, 2015) (SR-NSCC-2015-802).
    \12\ 17 CFR 240.15c3-3; see supra, note 6.
    \13\ See supra, note 6.
    \14\ In this context, ``short positions'' refer to Securities 
that have been deposited by, and credited to the Account of, a DTC 
Participant, pending re-registration into the name of Cede & Co., 
the DTC nominee, which are nevertheless permitted to be delivered to 
another DTC Participant; this 130 percent charge is held by DTC 
until the Securities are re-registered. See supra, note 6.
    \15\ See supra, note 6.
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    The Clearing Agency Investment Policy would set forth guiding 
principles for the investment of funds, which include adherence to a 
conservative investment philosophy that places the highest priority on 
maximizing liquidity and avoiding risk. The guiding principles would 
also mandate the segregation and separation of deposits to the 
respective NSCC and FICC Clearing Funds and the DTC Participants Fund, 
so that such amounts are not commingled with each other or with other 
funds held by the Clearing Agencies. The guiding principles would also 
address the process for evaluating the credit ratings of counterparties 
and setting investment limits, which would be evaluated, reviewed, and 
approved quarterly by CCR. Finally, the guiding principles would make 
clear that risk of investment loss is addressed by the rules of each of 
the Clearing Agencies.
    The Clearing Agency Investment Policy would identify permitted 
investments and the parameters of, and limitations on, each type of 
investment. In general, assets would be required to be held by 
regulated and creditworthy financial institution counterparties and 
invested in specified types of financial instruments. Permitted 
financial investments may include, for example, deposits with banks, 
including the Federal Reserve Bank of New York, collateralized reverse-
repurchase agreements, direct obligations of the U.S. government, 
money-market mutual funds, and high-grade corporate debt.\16\ 
Additionally, the Clearing Agencies would, pursuant to the Clearing 
Agency Investment Policy, be permitted to use general corporate funds, 
and only such funds, to enter into hedge transactions to manage certain 
corporate exposures, such as interest rate or foreign currency risk; 
hedge transactions would not be permitted to be engaged in for 
speculative purposes.
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    \16\ Only general corporate funds of a Clearing Agency would be 
permitted to be invested in high-grade corporate debt.
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    Investments in collateralized reverse repurchase agreements would 
be secured by debt obligations of the U.S. Government or Agencies 
guaranteed by the U.S. Government, or by mortgage pass-through 
obligations issued by the Government National Mortgage Association, the 
Federal Home Loan Mortgage Corporation, and the Federal National 
Mortgage Association. Collateral posted by a counterparty to a reverse 
repurchase agreement (whether securities or a combination of securities 
and cash) would be required to have a market value equal to 102 percent 
or greater of the cash invested. Investments

[[Page 91234]]

would also be permitted in money market mutual funds that have a credit 
rating from one or more recognized rating agencies. All permitted 
investments would be short-term and readily accessible for liquidity, 
should the need arise, minimizing market risk.

Notice of Filing of Amendments No. 1

    In Amendments No. 1, the Clearing Agencies make a technical 
correction to the proposed Clearing Agency Investment Policy. The 
originally filed Clearing Agency Investment Policy referenced a pending 
request for no action relief with the Commission regarding how NSCC 
would invest funds in its Fully-Paid-For Account. On December 1, 2016, 
the Division of Trading and Markets staff (``Division'') took a no-
action position regarding how NSCC could invest funds in its Fully-
Paid-For Account.\17\ As such, Amendments No. 1 would amend the 
Clearing Agency Investment Policy to reflect that the Division took a 
no action position.
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    \17\ See NSCC, SEC No-Action Letter (December 1, 2016), 
available at https://www.sec.gov/divisions/marketreg/mr-noaction/2016/national-securities-clearing-corporation-120116.pdf.
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II. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \18\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that such proposed rule change is consistent with the 
requirements of the Act and rules and regulations thereunder applicable 
to such organization. The Commission believes the Proposed Rule 
Changes, as modified by Amendments No. 1, are consistent with Section 
17A(b)(3)(F) of the Act and Rule 17Ad-22(d)(3),\19\ as described below.
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    \18\ 15 U.S.C. 78s(b)(2)(C).
    \19\ 15 U.S.C. 78q-1(b)(3)(F); 17 CFR 240.17Ad-22(d)(3).
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A. Consistency With Section 17A(b)(3)(F)

    Section 17A(b)(3)(F) of the Act requires, in part, that the rules 
of a clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions, to assure the 
safeguarding of securities and funds which are in the custody or 
control of the Clearing Agency or for which it is responsible, and, in 
general, to protect investors and the public interest.\20\
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    \20\ 15 U.S.C. 78q-1(b)(3)(F).
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    As described above, the investment guidelines and governance 
procedures set forth in the Clearing Agency Investment Policy would 
adhere to a conservative investment philosophy that places the highest 
priority on maximizing liquidity and avoiding risk to the funds in the 
custody of the Clearing Agencies. The Clearing Agency Investment Policy 
would require the segregation of funds of each Clearing Agency, 
including by fund type, to help ensure that the funds of one Clearing 
Agency would be protected from the risk of default of another Clearing 
Agency. Further, the Clearing Agency Investment Policy would require 
that each Clearing Agency invest its funds in instruments with minimal 
credit, market, and liquidity risks. For instance, excluding the 
general corporate funds of the Clearing Agencies, funds could only be 
invested in collateralized reverse-repurchase agreements, U.S. 
government debt, certain money market mutual funds, or deposited at a 
bank, such as the Federal Reserve Bank of New York. Additionally, the 
Clearing Agency Investment Policy also would require that the Clearing 
Agencies evaluate the credit risk of investment counterparties to help 
mitigate exposure of the funds to an investment counterparty default. 
Similarly, the Clearing Fund Investment Policy would establish 
investment limits by counterparty, as well as investment type, which 
would also help limit the Clearing Agencies' exposure to any single 
investment counterparty and, thus, limit potential losses of 
investments if a counterparty would default.
    Because the Clearing Fund Investment Policy would adhere to a 
conservative investment philosophy that places a premium on maximizing 
liquidity and avoiding risk, the invested funds should be readily 
available to promptly facilitate end-of-day settlement, including in 
the event of a default by a member of a Clearing Agency. Therefore, the 
Clearing Agency Investment Policy would help assure the safeguarding of 
securities and funds in the custody and control of the Clearing 
Agencies, which, in turn, helps promote the prompt and accurate 
clearance and settlement of securities transactions by the Clearing 
Agencies. Likewise, the safeguarding of securities and funds in the 
Clearing Agencies control would further the protection of investors and 
the public interest by ensuring that trades are settled even in the 
event of a default by a member of a Clearing Agency, consistent with 
Section 17A(b)(3)(F) of the Act.\21\
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    \21\ Id.
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B. Consistency With Rule 17Ad-22(d)(3)

    Rule 17Ad-22(d)(3), promulgated under the Act, requires a clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to hold assets in a manner that 
minimizes risk of loss or delay in its access to them and to invest 
assets in instruments with minimal credit, market and liquidity 
risks.\22\ As stated above, the Clearing Agency Investment Policy would 
follow a conservative investment philosophy, placing the highest 
priority on maximizing liquidity and avoiding risk of loss. The 
Clearing Agency Investment Policy would require the segregation of 
funds of each Clearing Agency, necessitate the use of external credit 
ratings in the evaluation of counterparties where non-general corporate 
funds are invested, and establish investment limits by counterparty as 
well as investment type. Further, the Clearing Agency Investment Policy 
would require that each Clearing Agency invest its funds in instruments 
with minimal credit, market, and liquidity risks. As such, the Clearing 
Agency Investment Policy is consistent with the requirements of Rule 
17Ad-22(d)(3), promulgated under the Act.\23\
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    \22\ 17 CFR 240.17Ad-22(d)(3).
    \23\ Id.
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III. Solicitation of Comments on Amendments No. 1

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendments No. 1 to File Numbers SR-DTC-2016-007, 
SR-FICC-2016-005, and SR-NSCC-2016-003, including whether Amendments 
No. 1 are 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-DTC-2016-005, SR-FICC-2016-005, or SR-NSCC-2016-003 on 
the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549.

All submissions should refer to File Number SR-DTC-2016-007, SR-FICC-
2016-005, or SR-NSCC-2016-003. The 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

[[Page 91235]]

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 Changes that are filed 
with the Commission, and all written communications relating to the 
Proposed Rule Changes 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 filings also will be available 
for inspection and copying at the principal office of DTCC and on 
DTCC's Web site (http://dtcc.com/legal/sec-rule-filings.aspx). 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-DTC-2016-007, SR-FICC-2016-
005, or SR-NSCC-2016-003 and should be submitted on or before January 
3, 2017.

IV. Accelerated Approval of the Proposed Rule Changes, as Modified by 
Amendments No. 1

    The Commission, pursuant to Section 19(b)(2) of the Act,\24\ finds 
good cause to approve the Proposed Rule Changes, as modified by 
Amendments No. 1, prior to the thirtieth day after the date of 
publication of Amendments No. 1 in the Federal Register. In Amendments 
No. 1, the Clearing Agencies make a technical correction to the 
Clearing Agency Investment Policy. The originally filed Clearing Agency 
Investment Policy referenced a pending request for no action relief 
with the Commission regarding how NSCC would invest funds in its Fully-
Paid-For Account. On December 1, 2016, the Division took a no-action 
position regarding how NSCC could invest funds in its Fully-Paid-For 
Account.\25\ As such, Amendments No. 1 would amend the Clearing Agency 
Investment Policy to reflect the Division's position.
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    \24\ 15 U.S.C. 78s(b)(2).
    \25\ See NSCC, SEC No-Action Letter (December 1, 2016), 
available at https://www.sec.gov/divisions/marketreg/mr-noaction/2016/national-securities-clearing-corporation-120116.pdf.
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    As discussed more fully above, the Commission finds that the 
Proposed Rule Changes, as modified by Amendments No. 1, will establish 
a Clearing Agency Investment Policy that adheres to a conservative 
investment philosophy that places the highest priority on maximizing 
liquidity and avoiding risk to the funds in the custody of the Clearing 
Agencies, thereby promoting the prompt and accurate clearance and 
settlement of securities, consistent with Section 17A(b)(3)(F) of the 
Act, cited above. The Commission also finds, as discussed above, that 
via the Proposed Rule Changes, as modified by Amendments No. 1, NSCC 
will hold the described funds in a manner that minimizes the risk of 
loss or delay in access to them and will invest the funds in 
instruments with minimal credit, market and liquidity risks, consistent 
with Rule 17Ad-22(d)(3) of the Act, cited above. Additionally, the 
Commission finds that Amendments No. 1 only made a technical, non-
substantive change to the Investment Policy as originally proposed. 
Accordingly, the Commission finds good cause for approving the Proposed 
Rule Changes, as modified by Amendments No. 1, on an accelerated basis, 
pursuant to Section 19(b)(2) of the Act.\26\
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    \26\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    On the basis of the foregoing, the Commission finds that the 
Proposed Rule Changes, as modified by Amendments No. 1, are consistent 
with the requirements of the Act and in particular with the 
requirements of Section 17A of the Act \27\ and the rules and 
regulations thereunder.
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    \27\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that proposed rule changes SR-DTC-2016-007, SR-FICC-2016-005, and SR-
NSCC-2016-003, as modified by Amendments No. 1, be, and hereby are, 
approved on an accelerated basis.\28\
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    \28\ In approving the Proposed Rule Changes, the Commission 
considered the proposals' impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\29\
Eduardo A. Aleman,
Assistant Secretary.
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    \29\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2016-30256 Filed 12-15-16; 8:45 am]
 BILLING CODE 8011-01-P