Document ID: SEC-2017-0058-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Depository Trust Co.
Posted Date: 2017-01-13T05:00Z

[Federal Register Volume 82, Number 9 (Friday, January 13, 2017)]
[Notices]
[Pages 4434-4437]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-00626]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79764; File No. SR-DTC-2016-008]

Self-Regulatory Organizations; The Depository Trust Company; 
Order Granting Approval of Proposed Rule Change Relating To Processing 
of Transactions in Money Market Instruments

January 9, 2017.
    The Depository Trust Company (``DTC'') filed on September 23, 2016 
with the Securities and Exchange Commission (``Commission'') proposed 
rule change SR-DTC-2016-008 (``Proposed Rule Change'') pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ 
and Rule 19b-4 thereunder.\2\ The Proposed Rule Change was published 
for comment in the Federal Register on October 11, 2016.\3\ On, 
November 18, 2016, the Commission extended to January 9, 2017 the date 
by which it shall either approve, disapprove, or institute proceedings 
to determine whether to approve or disapprove the Proposed Rule 
Change.\4\ The Commission did not receive any comments on the Proposed 
Rule Change. For the reasons discussed below, the Commission is 
granting approval of the Proposed Rule Change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 34-79046 (October 5, 
2016), 81 FR 70200 (October 11, 2016) (SR-DTC-2016-008) 
(``Notice''). DTC also filed the Proposed Rule Change as an advance 
notice with the Commission, pursuant to Section 806(e)(1) of the 
Payment, Clearing, and Settlement Supervision Act of 2010 and Rule 
19b-4(n)(1) under the Act. 12 U.S.C. 5465(e) and 17 CFR 240.19b-
4(n)(1), respectively. The advance notice was published in the 
Federal Register on November 9, 2016. Securities Exchange Act 
Release No. 79224 (November 3, 2016), 81 FR 78884 (November 9, 2016) 
(SR-DTC-2016-802). The Commission did not receive any comments on 
the advance notice.
    \4\ Securities Exchange Act Release No. 34-79351 (November 18, 
2016), 81 FR 85295 (November 25, 2016) (SR-DTC-2016-008)
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I. Description of the Proposed Rule Change

    The Proposed Rule Change is a proposal by DTC to modify (i) the DTC 
Rules, By-laws and Organization Certificate (``Rules''),\5\ (ii) the 
DTC Settlement Service Guide (``Settlement Guide''),\6\ and (iii) the 
DTC Distributions Service Guide (``Distributions Guide''),\7\ in order 
to change the way in which DTC processes transactions in money market 
instruments (``MMI''). The proposal would affect DTC's processing of 
issuances of MMI securities as well as maturity presentments, income 
presentments, principal presentments, and reorganization presentments 
(collectively, ``presentments'' and with issuances of MMI securities, 
``MMI Obligations'').
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    \5\ Available at http://www.dtcc.com/legal/rules-and-procedures.aspx.
    \6\ Available at http://www.dtcc.com/~/media/Files/Downloads/
legal/service-guides/Settlement.pdf.
    \7\ Available at http://www.dtcc.com/~/media/Files/Downloads/
legal/service-guides/
Distributions%20Service%20Guide%20FINAL%20November%202014.pdf.
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    Specifically, DTC proposes to: (i) With respect to delivery of MMI 
securities, require purchasers of the securities (or their custodian, 
if applicable) to acknowledge that they agree to receive the securities 
via DTC's Receiver Authorized Delivery (``RAD'') system before DTC 
processes the transaction; (ii) with respect to cash, require an 
issuing and paying agent (``IPA'') of an MMI issuer to acknowledge its 
funding obligations for MMI presentments before DTC processes the 
transaction, except in limited circumstances where there are no funding 
obligations; \8\ (iii) implement an enhanced process to check certain 
MMI transactions against DTC's risk management controls (referred to as 
``MMI Optimization''); (iv) eliminate the largest provisional net 
credit risk management control; and (v) eliminate DTC's receive versus 
payment net additions control, as described below. In addition, the 
proposal would amend DTC's Distributions Guide to conform to the 
proposed changes.
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    \8\ An affirmative MMI funding acknowledgement by the IPA would 
not be required where the aggregate amount of an issuer's delivery 
of MMI securities that have been approved in RAD exceeds the 
aggregate amount of presentments because payment for those 
securities would fully fund the presentments. In such a case, the 
IPA would be deemed to have provided a funding acknowledgement and 
DTC would process the transactions, subject to risk management 
controls.
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A. Background

    Today, according to DTC, when an issuer issues MMI securities at 
DTC, the IPA for that issuer sends issuance

[[Page 4435]]

instructions to DTC electronically, which results in crediting the 
applicable MMI securities to the DTC account of the IPA. The MMI 
securities are then delivered by DTC to the accounts of the applicable 
DTC participants (``Participants'') that are purchasing the issuance, 
typically as custodians for individual investors, in accordance with 
their purchase amounts. The IPA's delivery instructions may be free of 
payment or, most often, for payment (i.e., delivery versus payment or 
``DVP''). Unlike deliveries free of payment, DVP transactions are 
subject to DTC's risk management controls for both the IPA and the 
receiving Participants, which means they are monitored for Net Debit 
Cap and Collateral Monitor sufficiency.\9\
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    \9\ DVP transfers at DTC are structured so that the completion 
of delivery of securities to a Participant in end-of-day settlement 
is contingent on the receiving Participant satisfying its end-of-day 
net settlement obligation, if any. The risk of Participant failure 
to settle is managed through risk management controls that would 
enable DTC to complete settlement despite the failure to settle of 
the Participant, or affiliated family of Participants, with the 
largest net settlement obligation. The two principal controls are 
the Net Debit Cap and Collateral Monitor. The largest net settlement 
obligation of a Participant or affiliated family of Participants 
cannot exceed DTC liquidity resources, based on the Net Debit Cap, 
and must be fully collateralized, based on the Collateral Monitor.
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    When MMI securities of a particular acronym \10\ mature, the 
current presentment process involves DTC automatically sweeping the 
matured positions from the applicable Participant accounts and debiting 
the settlement account of the applicable IPA for the amount of the 
matured position, with corresponding credits made to the settlement 
accounts of the deliverers. Because presentments are currently 
processed automatically at DTC, IPAs have the option to refuse to pay 
(``RTP'') for maturing MMI Obligations to protect against the 
possibility that an IPA may not be able to fund settlement because it 
has not received funds from the relevant issuer. An IPA that refuses 
payment for a presentment (i.e., refuses to make payment for the 
delivery of matured MMI securities for which it is the designated IPA 
and/or pay interest or dividend income on MMI securities for which it 
is the designated IPA) must notify DTC of its RTP. An IPA may notify 
DTC of an RTP until 3:00 p.m. ET on the date of the affected 
presentment.
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    \10\ MMI of an issuer are designated by DTC using unique four-
character identifiers referred to as acronyms. An MMI issuer can 
have multiple acronyms representing its securities. MMI transactions 
and other functions relating to MMI are done on an ``acronym-by-
acronym'' basis.
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    Under the current Rules, the effect of an RTP is for DTC to reverse 
all processed MMI security deliveries of that MMI acronym, including 
issuances, related funds credits and debits, and presentments, which 
means that the securities would fail to settle. This reversal of 
processed (but not yet settled) transactions could override DTC's risk 
management controls (i.e., Collateral Monitor and Net Debit Cap) and 
could result in a Participant's account having, unexpectedly, a net 
debit balance that exceeds its Net Debit Cap and/or having insufficient 
collateral to secure its settlement obligations throughout the day. 
Thus, RTPs can create uncertainty and pose systemic risk with respect 
to a Participant's and, ultimately, DTC's ability to complete end-of-
day net funds settlement.
    Currently, to mitigate the risks associated with an RTP, the Rules 
and the Settlement Guide provide for the Largest Provisional Net Credit 
control (``LPNC Control''). Under the LPNC Control, DTC withholds from 
each Participant's Net Debit Cap the two largest intraday net MMI 
credits owed to that Participant. The MMI credits withheld are not 
included in the calculation of the Participant's Collateral Monitor or 
its net debit balance. This provides protection in the event that 
processed (but not yet settled) MMI transactions are reversed by DTC as 
a result of an RTP.\11\
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    \11\ See Securities Exchange Act Release No. 71888 (April 7, 
2014), 79 FR 20285 (April 11, 2014) (SR-DTC-2014-02) (clarifying the 
LPNC procedures in the Settlement Guide) and Securities Exchange Act 
Release No. 68983 (February 25, 2013), 78 FR 13924 (March 1, 2013) 
(SR-DTC-2012-10) (updating the Rules related to LPNC).
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    According to DTC, its Rules and procedures relating to settlement 
processing for the MMI program \12\ were designed to limit credit, 
liquidity, and operational risk for DTC and Participants. In connection 
with ongoing efforts by DTC to evaluate the risk associated with the 
processing of MMI Obligations, DTC has determined that the risks 
presented by intra-day reversals of processed MMI Obligations should be 
eliminated to prevent the possibility that a reversal could override 
DTC's risk controls and heighten liquidity and settlement risk. DTC 
also states that eliminating intra-day reversals of processed MMI 
Obligations would enhance intra-day finality and allow for the 
elimination of the LPNC Control, which creates intra-day blockage and 
affects liquidity through the withholding of settlement credits.
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    \12\ The procedures applicable to MMI settlement processing are 
set forth in the Settlement Guide. Supra note 6.
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B. Proposed Changes

    The proposal would eliminate provisions for intra-day reversals of 
processed MMI Obligations based on an IPA's RTP or issuer insolvency of 
which DTC becomes aware, as described below.
    Pursuant to the proposal, DTC would no longer automatically process 
MMI Obligations. DTC's processing of MMI Obligations involves the 
delivery of cash and/or securities. With respect to securities, DTC 
would require purchasers of MMI issuances (or their custodian, if 
applicable) to acknowledge in RAD that they agree to receive the MMI 
securities before DTC processes the transaction. With respect to cash, 
an IPA would make an MMI funding acknowledgment using a new DTC 
platform designed to accept such acknowledgments. When an MMI funding 
acknowledgement is received, DTC would attempt to process transactions 
in the acronym(s) for which the MMI funding acknowledgment pertains.
    If the IPA has provided an MMI funding acknowledgment for the full 
amount of presentments, then all transactions in that acronym would be 
sent to the normal DTC processing system and tested against DTC's risk 
management controls. If the IPA provides an MMI funding acknowledgement 
for only partial funding of the presentments, then DTC would undertake 
the proposed ``MMI Optimization'' process to determine whether risk 
management controls would be satisfied by all deliverers and purchasers 
of the acronym and determine whether all parties would maintain 
adequate positions to complete the applicable transactions. However, as 
long as the issuances that could satisfy deliverer and purchaser risk 
controls for that MMI acronym are equal to or greater than the maturing 
presentments of that acronym, the applicable transactions (i.e., those 
that pass risk controls) could be processed without an IPA's funding 
acknowledgement.
    If DTC does not receive the necessary acknowledgments from both the 
IPA and purchasers for an acronym for which maturing MMI Obligations 
are due on that day and/or DTC is aware, through ordinary business 
channels, that the issuer of an acronym is insolvent (``Acronym Payment 
Failure''), then DTC would not process transactions in the acronym.\13\
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    \13\ DTC would automatically consider an Acronym Payment Failure 
that occurred due to an IPA's failure to provide timely MMI funding 
acknowledgement (i.e., provide the acknowledgment by 3:00 p.m. ET) 
as an RTP.
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    In the event of an Acronym Payment Failure, DTC would: (i) Prevent 
further issuance and maturity activity for the acronym in DTC's system; 
(ii) prevent

[[Page 4436]]

deliveries of MMI securities of the acronym and halt all activity in 
that acronym; (iii) set the collateral value of the MMI securities in 
the acronym to zero for purposes of calculating the Collateral Monitor 
of any affected Participant; and (iv) notify Participants of the 
Acronym Payment Failure via DTC's current notification process. 
Notwithstanding the occurrence of an Acronym Payment Failure, the IPA 
would remain liable for funding pursuant to any MMI funding 
acknowledgment previously provided for that business day.
    A ``Temporary Acronym Payment Failure'' would occur when an IPA 
notifies DTC that it temporarily refuses to pay income presentments, 
and only income presentments, for an acronym, which typically would be 
due to an issuer's inability to fund income presentments on that day. A 
Temporary Acronym Payment Failure would only be initiated if there are 
no maturity presentments, principal presentments, and/or reorganization 
presentments on that business day. DTC would require the issuer and/or 
IPA to resolve such a situation by the next business day.
    In the event of a Temporary Acronym Payment Failure, DTC would: (i) 
Temporarily devalue to zero all of the issuer's MMI securities for 
purposes of calculating the Collateral Monitor, unless and until the 
IPA acknowledges funding with respect to the income payments on the 
following business day; (ii) notify Participants of the delayed 
payment; and (iii) block from DTC's systems all further issuances and 
maturities by that issuer for the remainder of the business day on 
which notification of the Temporary Payment Failure was received by 
DTC. An IPA would not be able to avail itself of a Temporary Acronym 
Payment Failure for the same acronym on consecutive business days.
    The Commission understands that the proposal would not: (i) 
Decrease the total number and value of transactions that would pass 
DTC's risk controls throughout the processing day; or (ii) increase the 
volume of transactions that would fail to settle. The Commission also 
understands that the proposal would reduce blockage caused by DTC. Non-
MMI transactions and fully funded MMI transactions would likely have a 
reduction in blockage because of the elimination of the LPNC Control. 
The elimination of the LPNC Control would no longer withhold billions 
of dollars of settlement credits as it does today, thus permitting MMI 
transactions subject to the LPNC Control to process earlier in the day. 
Moreover, it is expected that the value and volume of MMI transactions 
recycling due to failure to meet DTC's risk management controls during 
the late morning and afternoon periods would be reduced, because of 
such transactions being held outside of DTC's processing system while 
they await the necessary acknowledgments.
    Similar to the LPNC Control, the RVPNA Control is used to prevent a 
Participant from delivering free of value or undervalued any MMI 
securities that were received for payment on the same day.\14\ For 
example, under DTC's current rules, if Participant A delivers MMI 
securities to Participant B for payment, and then Participant B 
delivers the same MMI securities to Participant C free of payment 
(subject to risk management controls), the delivery to Participant C is 
final when the securities are credited to Participant C. DTC would, 
therefore, be unable to reverse the delivery to Participant C and, 
thus, DTC could not reverse the delivery from Participant B to 
Participant A. The RVPNA Control protects DTC against being unable to 
reverse such transactions of MMI Securities in the event of an RTP by 
the IPA. Because DTC would no longer permit the reversal of processed 
MMI transactions, DTC would no longer need the RVPNA Control.
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    \14\ For purposes of RVPNA, MMI securities are considered 
undervalued if they are delivered for less than 10 percent below 
market value.
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II. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \15\ 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 Change 
is consistent with Section 17A(b)(3)(F) of the Act and Rule 17Ad-
22(d)(12) under the Act,\16\ as described in detail below.
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    \15\ 15 U.S.C. 78s(b)(2)(C).
    \16\ 15 U.S.C. 78q-1(b)(3)(F); 17 CFR 240.17Ad-22(d)(12).
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A. Consistency With Section 17A(b)(3)(F) of the Act

    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 and to protect 
investors and the public interest.\17\
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    \17\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Commission believes that the Proposed Rule Change is consistent 
with promoting prompt and accurate clearance and settlement. First, as 
described above, DTC automatically processes MMI transactions today but 
permits RTPs in order to enable IPAs to protect against the possibility 
that the IPA does not receive the necessary funds from the relevant 
issuer. However, if DTC reverses processed (but not yet settled) MMI 
transactions because of an RTP, the transactions would fail to settle 
and the reversal could override DTC's risk management controls.
    The Proposed Rule Change would eliminate such reversals, failures, 
and possible overrides because the proposal would require, before DTC 
would process an MMI transaction, that (i) purchasers of MMI issuances 
(or their custodian, if applicable) authorize delivery of the MMI 
securities, and (ii) IPAs provide an MMI funding acknowledgement that 
commits the IPA to the acknowledge funds. If DTC does not receive a RAD 
authorization or MMI funding acknowledgement, as applicable, it would 
not process the MMI transaction. However, if a RAD authorization or an 
MMI funding acknowledgment is receive, DTC would no longer permit an 
RTP for what was authorized or acknowledge, thus eliminating the risk 
that the applicable MMI transaction would fail to settle or override 
DTC's risk management controls due to an RTP. Although theses proposed 
changes would establish new requirements before DTC would process such 
MMI transactions, the Commission believes that the benefits of 
eliminating the risk of a potential override of DTC's risk management 
controls from an RTP supports such requirements.
    Second, the Proposed Rule Change would help ensure prompt and 
accurate clearance and settlement securities by employing the proposed 
MMI Optimization. MMI Optimization would, for MMI transactions that 
await funding, continually test the net effect of transactions, across 
multiple MMI issuers, on receiving and delivering Participants' risk 
controls, and then process the transactions once the controls are met. 
As such, MMI Optimization would help maximize processing and facilitate 
more timely settlement of MMI transactions, thus reducing risks that 
transactions may not settle.
    Third, the proposed removal of the LPNC and RVPNA Controls also 
would further promote prompt clearance and settlement. As described 
above, the LPNC Control currently withholds from each Participant the 
two largest intraday net MMI credits out of all of the MMI credits owed 
to that Participant in order to protect DTC from a Participant

[[Page 4437]]

breaching its Net Debit Cap or having insufficient collateral in the 
event of a reversal caused by an RTP. However, withholding the credits 
makes them unavailable to the Participant, which can cause blockage 
(i.e., the failure of a transaction to process because of insufficient 
liquidity) for the Participant. Meanwhile, the RVPNA Control limits a 
Participant's ability to deliver MMI that the Participant is due to 
receive that day. By preventing Participants from delivering certain 
MMI securities, the RVPNA Control also can create blockage.
    Because DTC would no longer process MMI transactions without a 
purchaser's RAD authorization and an IPA's MMI funding acknowledgement, 
as applicable, RTPs and resulting intraday reversals no longer present 
the risk that the LPNC and RVPNA Controls are meant to address. As 
such, DTC would eliminate these controls. This change would make 
available to Participants the intraday credits that were previously 
withheld by those controls, which would decrease intraday liquidity 
blockage for the Participant and enable DTC to process MMI transactions 
earlier. Thus, Participants would have less exposure to intraday 
reversals that increase liquidity and settlement risk and a more 
complete view of their actual intraday net debit and credit balances.
    The Commission also believes that the Proposed Rule Change is 
consistent with protecting investors and the public interest. As 
described above, DTC would no longer automatically process MMI 
presentments. Rather, DTC would require purchasers to authorize 
delivery via RAD and IPAs to provide a funding acknowledgment before 
processing MMI presentments, as applicable. Because these changes would 
eliminate the risk of reversals due to an RTP, the changes would 
mitigate the risk of a potential override of DTC's risk management 
controls. Thus, the Proposed Rule Change would help protect investors 
and the public interest by reducing DTC's exposure to potential 
failures, promoting DTC's safety and soundness, and providing greater 
assurance that transactions will settle despite a Participant default.
    Therefore, for the above reasons, the Commission believes that the 
Proposed Rule Change will help promote the prompt and accurate 
clearance and settlement of securities transactions and help protect 
investors and the public interest, consistent with Section 17A(b)(3)(F) 
of the Act, cited above.

B. Consistency With Rule 17Ad-22(d)(12)

    Rule 17Ad-22(d)(12) under the Act requires DTC to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to ensure that final settlement occurs no later 
than the end of the settlement day; and require that intraday or real-
time finality be provided where necessary to reduce risks.\18\ Through 
this proposal, DTC would no longer process MMI transactions 
automatically but, rather, would first require an IPA's funding 
acknowledgment and a purchaser's RAD authorization, as applicable. 
Where such acknowledgements and authorizations are provided, DTC would 
no longer permit an RTP, thus eliminating the risk of an intraday 
reversal of a processed MMI transaction. Additionally, the proposal 
would eliminate the LPNC and RVPNA Controls, which would help eliminate 
blockage caused by the LPNC Control's withholding of Participants' two 
largest net credits for MMI transactions and the RVPNA Control's 
restriction on delivering certain MMI securities. Each of these 
proposed changes, both individually and collectively, would help ensure 
that final settlement occurs at the end of the day. Therefore, the 
Commission believes that the changes proposed in the Advance Notice are 
consistent with Rule 17Ad-22(d)(12) under the Act.\19\
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    \18\ 17 CFR 240.17Ad-22(d)(12).
    \19\ Id.
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III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
Proposed Rule Change is consistent with the requirements of the Act and 
in particular with the requirements of Section 17A of the Act \20\ and 
the rules and regulations thereunder.
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    \20\ 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 change SR-DTC-2016-008 be, and hereby is, Approved 
as of the date of this order or the date of a notice by the Commission 
authorizing DTC to implement DTC's advance notice proposal (SR-DTC-
2016-802) that is consistent with this Proposed Rule Change, whichever 
is later.\21\
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    \21\ In approving the proposed rule change, 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.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-00626 Filed 1-12-17; 8:45 am]
 BILLING CODE 8011-01-P