Document ID: SEC-2019-0267-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: MIAX Emerald, LLC
Posted Date: 2019-03-12T04:00Z

[Federal Register Volume 84, Number 48 (Tuesday, March 12, 2019)]
[Notices]
[Pages 8931-8935]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-04423]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85251; File No. SR-EMERALD-2019-01]

Self-Regulatory Organizations; MIAX Emerald, LLC; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To 
Establish an Options Regulatory Fee

March 6, 2019.
    Pursuant to the provisions of 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 27, 2019, MIAX Emerald, LLC (``MIAX 
Emerald'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') a 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

    The Exchange is filing a proposal to amend the MIAX Emerald Fee 
Schedule (the ``Fee Schedule'') to establish an Options Regulatory Fee 
(``ORF'').
    While changes to the Fee Schedule pursuant to this proposal are 
effective upon filing, the Exchange has designated these changes to be 
operative on March 1, 2019.
    The text of the proposed rule change is available on the Exchange's 
website at http://www.miaxoptions.com/rule-filings/emerald, at MIAX's 
principal office, 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.

[[Page 8932]]

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

1. Purpose
    The purpose of the proposed rule change is to establish an ORF in 
the amount of $0.00060 per contract side. The amount of the proposed 
fee is based on historical industry volume, projected volumes on the 
Exchange, and projected Exchange regulatory costs. The Exchange's 
proposed ORF should balance the Exchange's regulatory revenue against 
the anticipated regulatory costs.
    The per-contract ORF will be assessed by MIAX Emerald to each MIAX 
Emerald Member for all options transactions, including Mini Options, 
cleared or ultimately cleared by the Member which are cleared by the 
Options Clearing Corporation (``OCC'') in the ``customer'' range, 
regardless of the exchange on which the transaction occurs. The ORF 
will be collected by OCC on behalf of MIAX Emerald from either (1) a 
Member that was the ultimate clearing firm for the transaction or (2) a 
non-Member that was the ultimate clearing firm where a Member was the 
executing clearing firm for the transaction. The Exchange will use 
reports from OCC to determine the identity of the executing clearing 
firm and ultimate clearing firm.
    To illustrate how the ORF will be assessed and collected, the 
Exchange provides the following set of examples. If the transaction is 
executed on the Exchange and the ORF is assessed, if there is no change 
to the clearing account of the original transaction, then the ORF is 
collected from the Member that is the executing clearing firm for the 
transaction. (The Exchange notes that, for purposes of the Fee 
Schedule, when there is no change to the clearing account of the 
original transaction, the executing clearing firm is deemed to be the 
ultimate clearing firm.) If there is a change to the clearing account 
of the original transaction (i.e., the executing clearing firm ``gives-
up'' or ``CMTAs'' the transaction to another clearing firm), then the 
ORF is collected from the clearing firm that ultimately clears the 
transaction--the ultimate clearing firm. The ultimate clearing firm may 
be either a Member or non-Member of the Exchange. If the transaction is 
executed on an away exchange and the ORF is assessed, then the ORF is 
collected from the ultimate clearing firm for the transaction. Again, 
the ultimate clearing firm may be either a Member or non-Member of the 
Exchange. The Exchange notes, however, that when the transaction is 
executed on an away exchange, the Exchange does not assess the ORF when 
neither the executing clearing firm nor the ultimate clearing firm is a 
Member (even if a Member is ``given-up'' or ``CMTAed'' and then such 
Member subsequently ``gives-up'' or ``CMTAs'' the transaction to 
another non-Member via a CMTA reversal). Finally, the Exchange will not 
assess the ORF on outbound linkage trades, whether executed at the 
Exchange or an away exchange. ``Linkage trades'' are tagged in the 
Exchange's system, so the Exchange can readily tell them apart from 
other trades. A customer order routed to another exchange results in 
two customer trades, one from the originating exchange and one from the 
recipient exchange. Charging ORF on both trades could result in double-
billing of ORF for a single customer order, thus the Exchange will not 
assess ORF on outbound linkage trades in a linkage scenario. This 
assessment practice is identical to the assessment practice currently 
utilized by the Exchange's affiliates, Miami International Securities 
Exchange, LLC (``MIAX Options'') and MIAX PEARL, LLC (``MIAX 
PEARL'').\3\
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    \3\ See Securities Exchange Act Release Nos. 80875 (June 7, 
2017), 82 FR 27096 (June 13, 2017) (SR-PEARL-2017-26); 81063 (June 
30, 2017), 82 FR 31668 (July 7, 2017) (SR-MIAX-2017-31).
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    As a practical matter, when a transaction that is subject to the 
ORF is not executed on the Exchange, the Exchange lacks the information 
necessary to identify the order entering member for that transaction. 
There are countless order entering market participants, and each day 
such participants can and often do drop their connection to one market 
center and establish themselves as participants on another. For these 
reasons, it is not possible for the Exchange to identify, and thus 
assess fees such as an ORF, on order entering participants on away 
markets on a given trading day.
    Clearing members, however, are distinguished from order entering 
participants because they remain identified to the Exchange on 
information the Exchange receives from OCC regardless of the identity 
of the order entering participant, their location, and the market 
center on which they execute transactions. Therefore, the Exchange 
believes it is more efficient for the operation of the Exchange and for 
the marketplace as a whole to collect the ORF from clearing members.
    The Exchange will monitor the amount of revenue collected from the 
ORF to ensure that it, in combination with other regulatory fees and 
fines, does not exceed regulatory costs. In determining whether an 
expense is considered a regulatory cost, the Exchange will review all 
costs and makes determinations if there is a nexus between the expense 
and a regulatory function. The Exchange notes that fines collected by 
the Exchange in connection with a disciplinary matter offset ORF.
    As discussed below, the Exchange believes it is appropriate to 
charge the ORF only to transactions that clear as customer at the OCC. 
The Exchange believes that its broad regulatory responsibilities with 
respect to a Member's activities supports applying the ORF to 
transactions cleared but not executed by a Member. The Exchange's 
regulatory responsibilities are the same regardless of whether a Member 
enters a transaction or clears a transaction executed on its behalf. 
The Exchange will regularly review all such activities, including 
performing surveillance for position limit violations, manipulation, 
front-running, contrary exercise advice violations and insider trading. 
These activities span across multiple exchanges.
    The ORF is designed to recover a material portion of the costs to 
the Exchange of the supervision and regulation of Members' customer 
options business, including performing routine surveillances and 
investigations, as well as policy, rulemaking, interpretive and 
enforcement activities. The Exchange believes that revenue generated 
from the ORF, when combined with all of the Exchange's other regulatory 
fees and fines, will cover a material portion, but not all, of the 
Exchange's regulatory costs. The Exchange notes that its regulatory 
responsibilities with respect to Member compliance with options sales 
practice rules have been allocated to the Financial Industry Regulatory 
Authority (``FINRA'') under a 17d-2 Agreement. The ORF is not designed 
to cover the cost of options sales practice regulation.
    The Exchange will monitor the amount of revenue collected from the 
ORF to ensure that it, in combination with its other regulatory fees 
and fines, does not exceed the Exchange's total regulatory costs. The 
Exchange will monitor MIAX Emerald regulatory costs and revenues at a 
minimum on a semi-annual basis. If the Exchange determines regulatory 
revenues exceed or are insufficient to cover a material portion of its 
regulatory costs, the Exchange will adjust the ORF by submitting a fee 
change filing to the Commission. Going forward, the Exchange will 
notify Members of adjustments to the ORF via regulatory

[[Page 8933]]

circular at least 30 days prior to the effective date of the change.
    The Exchange believes it is reasonable and appropriate for the 
Exchange to charge the ORF for options transactions regardless of the 
exchange on which the transactions occur. The Exchange has a statutory 
obligation to enforce compliance by Members and their associated 
persons under the Act and the rules of the Exchange and to surveil for 
other manipulative conduct by market participants (including non-
Members) trading on the Exchange. The Exchange cannot effectively 
surveil for such conduct without looking at and evaluating activity 
across all options markets. Many of the Exchange's market surveillance 
programs require the Exchange to look at and evaluate activity across 
all options markets, such as surveillance for position limit 
violations, manipulation, front-running and contrary exercise advice 
violations/expiring exercise declarations. While much of this activity 
relates to the execution of orders, the ORF is assessed on and 
collected from clearing firms. The Exchange, because it lacks access to 
information on the identity of the entering firm for executions that 
occur on away markets, believes it is appropriate to assess the ORF on 
its Members' clearing activity, based on information the Exchange 
receives from OCC, including for away market activity. Among other 
reasons, doing so better and more accurately captures activity that 
occurs away from the Exchange over which the Exchange has a degree of 
regulatory responsibility. In so doing, the Exchange believes that 
assessing ORF on Member clearing firms equitably distributes the 
collection of ORF in a fair and reasonable manner. Also, the Exchange 
and the other options exchanges are required to populate a consolidated 
options audit trail (``COATS'') \4\ system in order to surveil a 
Member's activities across markets.
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    \4\ COATS effectively enhances intermarket options surveillance 
by enabling the options exchanges to reconstruct the market promptly 
to effectively surveil certain rules.
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    In addition to its own surveillance programs, the Exchange will 
work with other SROs and exchanges on intermarket surveillance related 
issues. Through its participation in the Intermarket Surveillance Group 
(``ISG''),\5\ the Exchange will share information and coordinate 
inquiries and investigations with other exchanges designed to address 
potential intermarket manipulation and trading abuses. The Exchange's 
participation in ISG helps it to satisfy the requirement that it has 
coordinated surveillance with markets on which security futures are 
traded and markets on which any security underlying security futures 
are traded to detect manipulation and insider trading.\6\
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    \5\ ISG is an industry organization formed in 1983 to coordinate 
intermarket surveillance among the SROs by co-operatively sharing 
regulatory information pursuant to a written agreement between the 
parties. The goal of the ISG's information sharing is to coordinate 
regulatory efforts to address potential intermarket trading abuses 
and manipulations.
    \6\ See Section 6(h)(3)(I) of the Act.
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    The Exchange believes that charging the ORF across markets will 
avoid having Members direct their trades to other markets in order to 
avoid the fee and to thereby avoid paying for their fair share for 
regulation. If the ORF did not apply to activity across markets then a 
Member would send their orders to the least cost, least regulated 
exchange. Other exchanges do impose a similar fee on their member's 
activity, including the activity of those members on MIAX Emerald.\7\
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    \7\ Similar regulatory fees have been instituted by Nasdaq PHLX 
LLC (``Phlx'') (See Securities Exchange Act Release No. 61133 
(December 9, 2009), 74 FR 66715 (December 16, 2009) (SR-Phlx-2009-
100)); Nasdaq ISE, LLC (``ISE'') (See Securities Exchange Act 
Release No. 61154 (December 11, 2009), 74 FR 67278 (December 18, 
2009) (SR-ISE-2009-105)); and Nasdaq GEMX, LLC (``GEMX'') (See 
Securities Exchange Act Release No. 70200 (August 14, 2013) 78 FR 
51242 (August 20, 2013) (SR-Topaz-2013-01)).
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    The Exchange notes that there is established precedent for an SRO 
charging a fee across markets, namely, FINRAs Trading Activity Fee \8\ 
and the NYSE American LLC (``NYSE American''), NYSE Arca, Inc. (``NYSE 
Arca''), Cboe Exchange, Inc. (``CBOE''), Nasdaq PHLX LLC (``Phlx''), 
Nasdaq ISE, LLC (``ISE''), Nasdaq GEMX, LLC (``GEMX'') and BOX Exchange 
LLC (``BOX'') ORF. While the Exchange does not have all the same 
regulatory responsibilities as FINRA, the Exchange believes that, like 
other exchanges that have adopted an ORF, its broad regulatory 
responsibilities with respect to a Member's activities, irrespective of 
where their transactions take place, supports a regulatory fee 
applicable to transactions on other markets. Unlike FINRA's Trading 
Activity Fee, the ORF would apply only to a Member's customer options 
transactions.
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    \8\ See Securities Exchange Act Release No. 47946 (May 30, 
2003), 68 FR 34021 (June 6, 2003) (SR-NASD-2002-148).
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    The purpose of the proposed rule change is to establish an ORF in 
the amount of $0.00060 per contract side. The amount of the proposed 
fee is based on historical industry volume, projected volumes on the 
Exchange, and projected Exchange regulatory costs. The Exchange's 
proposed ORF should balance the Exchange's regulatory revenue against 
the anticipated regulatory costs.
    Additionally, the Exchange proposes to specify in the Fee Schedule 
that the Exchange may only increase or decrease the ORF semi-annually, 
and any such fee change will be effective on the first business day of 
February or August. In addition to submitting a proposed rule change to 
the Commission as required by the Act to increase or decrease the ORF, 
the Exchange will notify participants via a Regulatory Circular of any 
anticipated change in the amount of the fee at least 30 calendar days 
prior to the effective date of the change. The Exchange believes that 
by providing guidance on the timing of any changes to the ORF, the 
Exchange would make it easier for participants to ensure their systems 
are configured to properly account for the ORF.
    The Exchange is proposing to establish an ORF in the amount of 
$0.00060 per contract side, to be operative on March 1, 2019. The 
amount of the proposed fee is based on historical industry volume, 
projected volumes on the Exchange, and projected Exchange regulatory 
costs. As noted above, the Exchange will regularly review its ORF to 
ensure that the ORF, in combination with its other regulatory fees and 
fines, does not exceed regulatory costs. The Exchange believes that 
this proposal will permit the Exchange to cover a material portion of 
its regulatory costs, while not exceeding regulatory costs.
    The Exchange notified future Members via a Regulatory Circular of 
the proposed ORF at least thirty (30) calendar days prior to the 
proposed operative date, on December 31, 2018.\9\ The Exchange believes 
that the prior notification to future market participants will ensure 
that the future market participants are prepared to configure their 
systems to properly account for the proposed ORF.
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    \9\ See MIAX Emerald Regulatory Circular 2019-01 available at 
https://www.miaxoptions.com/sites/default/files/circular-files/MIAX_Emerald_RC_2019_01.pdf.
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2. Statutory Basis
    The Exchange believes that its proposal to amend its Fee Schedule 
is consistent with Section 6(b) of the Act \10\ in general, and 
furthers the objectives of Section 6(b)(4) of the Act \11\ in 
particular, in that it is an equitable allocation of reasonable dues, 
fees, and other charges among its members and issuers and other persons 
using its

[[Page 8934]]

facilities. The Exchange also believes the proposal furthers the 
objectives of Section 6(b)(5) of the Act \12\ 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 and is not designed to permit unfair discrimination between 
customers, issuers, brokers and dealers.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(4).
    \12\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that establishing an ORF in the amount of 
$0.00060 is reasonable because the Exchange's collection of ORF needs 
to be balanced against the amount of regulatory costs incurred by the 
Exchange. The Exchange believes that the amount proposed herein will 
serve to balance the Exchange's regulatory revenue against the 
anticipated regulatory costs.
    The Exchange believes the proposed ORF is equitable and not 
unfairly discriminatory because it is objectively allocated to Members 
in that it is charged to all Members on all their transactions that 
clear as customer at the OCC. Moreover, the Exchange believes the ORF 
ensures fairness by assessing fees to those Members that are directly 
based on the amount of customer options business they conduct. 
Regulating customer trading activity is much more labor intensive and 
requires greater expenditure of human and technical resources than 
regulating non-customer trading activity, which tends to be more 
automated and less labor-intensive. As a result, the costs associated 
with administering the customer component of the Exchange's overall 
regulatory program are materially higher than the costs associated with 
administering the non-customer component (e.g., Member proprietary 
transactions) of its regulatory program.
    The ORF is designed to recover a material portion of the costs of 
supervising and regulating Members' customer options business including 
performing routine surveillances and investigations, as well as policy, 
rulemaking, interpretive, and enforcement activities. The Exchange will 
monitor the amount of revenue collected from the ORF to ensure that it, 
in combination with its other regulatory fees and fines, does not 
exceed the Exchange's total regulatory costs. The Exchange has designed 
the ORF to generate revenues that, when combined with all of the 
Exchange's other regulatory fees, will be less than or equal to the 
Exchange's regulatory costs, which is consistent with the Commission's 
view that regulatory fees be used for regulatory purposes and not to 
support the Exchange's business side. In this regard, the Exchange 
believes that the amount of the fee is reasonable.
    The Exchange believes that the proposal to limit changes to the ORF 
to twice a year on specific dates with advance notice is reasonable 
because it will give participants certainty on the timing of changes, 
if any, and better enable them to properly account for ORF charges 
among their customers. The Exchange believes that limiting changes to 
the ORF to twice a year on specific dates is equitable and not unfairly 
discriminatory because it will apply in the same manner to all Members 
that are subject to the ORF and provide them with additional advance 
notice of changes to that fee.
    The Exchange believes that the proposal to collect the ORF from 
non-Members when such non-Members ultimately clear the transaction 
(that is, when the non-Member is the ``ultimate clearing firm'' for a 
transaction in which a Member was assessed the ORF) is an equitable 
allocation of reasonable dues, fees, and other charges among its 
members and issuers and other persons using its facilities. The 
Exchange notes that there is a material distinction between 
``assessing'' the ORF and ``collecting'' the ORF. The ORF is only 
assessed to a Member with respect to a particular transaction in which 
it is either the executing clearing firm or ultimate clearing firm. The 
Exchange does not assess the ORF to non-Members. Once, however, the ORF 
is assessed to a Member for a particular transaction, the ORF may be 
collected from the Member or a non-Member, depending on how the 
transaction is cleared at OCC. If there was no change to the clearing 
account of the original transaction, the ORF would be collected from 
the Member. If there was a change to the clearing account of the 
original transaction and a non-Member becomes the ultimate clearing 
firm for that transaction, then the ORF will be collected from that 
non-Member. The Exchange believes that this collection practice is 
reasonable and appropriate, and was originally instituted for the 
benefit of clearing firms that desired to have the ORF be collected 
from the clearing firm that ultimately clears the transaction.

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 not necessary or appropriate in 
furtherance of the purposes of the Act. This proposal will not create 
an unnecessary or inappropriate intra-market burden on competition 
because the ORF will apply to all customer activity, and is designed to 
enable the Exchange to recover a material portion of the Exchange's 
cost related to its regulatory activities. It will supplement the 
regulatory revenue derived from non-customer activity. This proposal 
will not create an unnecessary or inappropriate inter-market burden on 
competition because it will be a regulatory fee that supports 
regulation in furtherance of the purposes of the Act. The Exchange is 
obligated to ensure that the amount of regulatory revenue collected 
from the ORF, in combination with its other regulatory fees and fines, 
does not exceed regulatory costs. Unilateral action by MIAX Emerald in 
establishing fees for services provided to its Members and others using 
its facilities will not have an impact on competition. As a new entrant 
in the highly competitive environment for equity options trading, MIAX 
Emerald does not have the market power necessary to set prices for 
services that are unreasonable or unfairly discriminatory in violation 
of the Act. MIAX Emerald's proposed ORF, as described herein, is 
comparable to fees charged by other options exchanges for the same or 
similar services. The proposal to limit the changes to the ORF to twice 
a year on specific dates with advance notice is not intended to address 
a competitive issue but rather to provide Members with better notice of 
any change that the Exchange may make to the ORF.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act,\13\ and Rule 19b-4(f)(2) \14\ thereunder. 
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

[[Page 8935]]

takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or disapproved.
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    \13\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \14\ 17 CFR 240.19b-4(f)(2).
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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 No. SR-EMERALD-2019-01 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 No. SR-EMERALD-2019-01. 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 No. SR-EMERALD-2019-01, and should be submitted on 
or before April 2, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-04423 Filed 3-11-19; 8:45 am]
 BILLING CODE 8011-01-P