Document ID: SEC-2019-0342-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Miami International Securities Exchange, LLC
Posted Date: 2019-03-26T04:00Z

[Federal Register Volume 84, Number 58 (Tuesday, March 26, 2019)]
[Notices]
[Pages 11347-11354]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-05696]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85365; File No. SR-MIAX-2019-12]

Self-Regulatory Organizations; Miami International Securities 
Exchange, LLC; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change To Amend Exchange Rule 503

March 20, 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 March 7, 2019, Miami International Securities 
Exchange, LLC (``MIAX Options'' or the ``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 Exchange Rule 503, 
Openings on

[[Page 11348]]

the Exchange, Interpretations and Policies .03.
    The text of the proposed rule change is available on the Exchange's 
website at http://www.miaxoptions.com/rule-filings/ at MIAX Options' 
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.

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

1. Purpose
    On October 12, 2018, the Exchange received approval from the 
Securities and Exchange Commission (``SEC'' or ``Commission'') to list 
and trade on the Exchange, options on the SPIKESTM Index, a 
new index that measures expected 30-day volatility of the SPDR S&P 500 
ETF Trust (commonly known and referred to by its ticker symbol, 
``SPY'').\3\ To facilitate trading options on the Index the Exchange 
proposes to amend Exchange Rule 503, Openings on the Exchange, 
Interpretations and Policies .03.
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    \3\ See Securities Exchange Act Release No. 84417 (October 12, 
2018), 83 FR 52865 (October 18, 2018) (SR-MIAX-2018-14) (Order 
Granting Approval of a Proposed Rule Change by Miami International 
Securities Exchange, LLC to List and Trade on the Exchange Options 
on the SPIKES\TM\ Index).
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    Specifically, the Exchange proposes to amend Exchange Rule 503, 
Openings on the Exchange, Interpretations and Policies .03, to provide 
that bona fide Market Maker activity does not constitute either a 
SPIKES strategy order or a modification to or cancellation of a 
previously submitted SPIKES strategy order during the ``SPIKES Special 
Settlement Auction.''
    The SPIKES Index is calculated using only standard options on SPY 
that expire on the third Friday of each calendar month. Although weekly 
options on SPY are available, these are not used in the calculation of 
the Index. To determine the final settlement value of the Index, the 
Exchange performs an Index settlement price calculation which includes 
all SPY options that expire 30 days after the SPIKES settlement that 
are included in the settlement (these options are referred to in this 
rule filing as the ``constituent options''). In order to perform the 
Index settlement price calculation, each constituent option is assigned 
a Settlement Reference Price or ``SRP,'' defined and discussed in more 
detail below. Each SRP is determined using the SPIKES Special 
Settlement Auction, which is conducted once per month, in the 
constituent options traded on the Exchange, on final settlement day. 
The SPIKES Special Settlement Auction utilizes the Exchange's standard, 
existing Opening Process, as defined and fully-described in Exchange 
Rule 503(f), with a modification to account for situations where there 
remains an order imbalance \4\ that must be filled at the opening price 
after the requisite number of iterations of the imbalance process takes 
place under the Exchange's existing Opening Process (the Exchange's 
existing Opening Process provides that the Exchange can open with an 
imbalance after the requisite number of iterations of the imbalance 
process takes place).\5\ This modification to the Exchange's existing 
Opening Process to facilitate the execution of this remaining must-fill 
interest is referred to as the special settlement imbalance process 
(``SSIP''), which is governed by Interpretations and Policies .03 to 
Exchange Rule 503, as described more fully below. This modified Opening 
Process functionality, which is accessible to all Members of the 
Exchange for participation, occurs in highly liquid SPY options (which 
are simultaneously opening and available for trading on up to 14 other 
exchanges, thus providing real-time cross-reference prices for the SPY 
options included in the settlement) is used to conduct the SPIKES 
Special Settlement Auction to settle expiring SPIKES options.
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    \4\ An ``imbalance'' occurs when there is insufficient liquidity 
to satisfy all trading interest due an execution at a certain price. 
See Exchange Rule 503(f)(2)(v).
    \5\ See Exchange Rule 503(f)(2)(vii)(B)(5).
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    As discussed more fully below, the Exchange's existing Opening 
Process runs to completion and precedes the engagement of the new SSIP. 
The existing Opening Process cannot occur prior to 9:30 a.m. Eastern 
Time and only begins following the dissemination of a quote or trade in 
the market for the underlying security.\6\ Following the dissemination 
of a quote or trade in the market for the underlying security, the 
System \7\ pauses for a period of time no longer than one half second 
to allow the marketplace to absorb this information.\8\ When there is 
an imbalance,\9\ the System broadcasts a System Imbalance Message 
(which includes the symbol, side of the market, quantity of matched 
contracts, the imbalance quantity, must fill quantity (i.e., the number 
of contracts that must be filled in order for that option to open on 
the Exchange at the indicated price), quantity of routable contracts, 
and price of the affected series) to subscribers of the Exchange's data 
feeds and begins an Imbalance Timer \10\ not to exceed three 
seconds.\11\ Under the existing Opening Process the Exchange may repeat 
this process up to three times.\12\ While the Exchange is conducting 
its Opening Process, all 14 other option exchanges will also be 
conducting their opening process for SPY options. As the Exchange works 
through its process to resolve imbalances under the existing Opening 
Process, other Exchanges will be open and serve as real-time cross-
reference prices for those SPY options, enabling market participants to 
send orders to the Exchange if there are pricing anomalies for these 
SPY options across venues. The longer it takes the Exchange to work 
through the imbalance, the greater the likelihood that other exchanges 
will have opened their SPY options market and the natural pressures of 
a competitive market helps to eliminate any pricing anomalies and aid 
in eliminating the imbalance on the Exchange.
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    \6\ See Exchange Rule 503(e)(1).
    \7\ The term ``System'' means the automated trading system used 
by the Exchange for the trading of securities. See Exchange Rule 
100.
    \8\ The Exchange notes that the current setting is one half 
second.
    \9\ See supra note 4.
    \10\ The Exchange notes that the current Imbalance Timer setting 
is one second.
    \11\ See Exchange Rule 503(f)(2)(vii).
    \12\ See Exchange Rule 503(f)(2)(vii)(B)(4).
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    As previously discussed, on the day the settlement value for the 
Index is calculated, the Exchange conducts the SPIKES Special 
Settlement Auction, using its standard, existing Opening Process for 
all options on the Exchange, including the constituent options.\13\ 
Pursuant to the standard, existing Opening Process, if there are no 
quotes or orders that lock or cross each other, the System will open by 
disseminating the Exchange's best bid and offer among quotes and orders 
that exist in the System at that time. If there are quotes or orders 
that lock each other, the System will calculate an Expanded

[[Page 11349]]

Quote Range (``EQR''), as described in Rule 503(f)(2). The EQR 
represents the limits of the range in which transactions may occur 
during the Opening Process.\14\ The EQR is recalculated any time a 
route timer or Imbalance Timer expires if material conditions of the 
market (imbalance size, ABBO \15\ price and size, liquidity price or 
size, etc.) have changed during the timer. Once calculated, the EQR 
represents the limits of the range in which transactions may occur 
during the Opening Process.\16\ The System uses the EQR to determine 
the highest and lowest price of the opening price range.
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    \13\ For a complete description of the Exchange's standard, 
existing Opening Process, refer to Exchange Rule 503, Openings on 
the Exchange.
    \14\ See Exchange Rule 503(f)(2)(i). See also Exchange 
Regulatory Circular 2012-02, which sets forth the tables that 
describe the calculation of the EQR for option classes traded on the 
Exchange, at http://www.miaxoptions.com/sites/default/files/circular-files/MIAX_Opening_Process_and_Pause_Timer.pdf.
    \15\ The term ``ABBO'' or ``Away Best Bid or Offer'' means the 
best bid(s) or offer(s) disseminated by other Eligible Exchanges 
(defined in Rule 1400(f)) and calculated by the Exchange based on 
market information received by the Exchange from OPRA. See Exchange 
Rule 100.
    \16\ See Exchange Rule 503(f)(2)(i).
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    To calculate the opening price, the System takes into consideration 
all valid Exchange quotes and all valid orders, together with other 
exchanges' markets for the series, and identifies the price at which 
the maximum number of contracts can trade. If that price is within the 
EQR and leaves no imbalance, the Exchange will open at that price, 
executing marketable trading interest as long as the opening price 
includes only Exchange interest.\17\ If the calculated opening price 
included interest other than solely Exchange interest, the System will 
broadcast a system imbalance message (which includes the symbol, side 
of the market, quantity of matched contracts, the imbalance quantity, 
must fill quantity, quantity of routable contracts, and price of the 
affected series) to Exchange Members \18\ and initiate a ``route 
timer,'' not to exceed one second.\19\
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    \17\ See Exchange Rule 503(f)(2)(iv).
    \18\ The term ``Member'' means an individual or organization 
approved to exercise the trading rights associated with a Trading 
Permit. Members are deemed ``members'' under the Exchange Act. See 
Exchange Rule 100.
    \19\ See Exchange Rule 503(f)(2)(iv)(A).
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    If all opening and marketable interest cannot be completely 
executed at or within the EQR without trading at a price inferior to 
the ABBO, or cannot trade at or within the quality opening market range 
in the absence of a valid width NBBO,\20\ the System will automatically 
institute an imbalance process.\21\ The System will broadcast a system 
imbalance message (which includes the symbol, side of the market, 
quantity of matched contracts, the imbalance quantity, must fill 
quantity, quantity of routable contracts, and price of the affected 
series) to subscribers of the Exchange's data feeds, and begin an 
Imbalance Timer, not to exceed three seconds.\22\ Market Makers \23\ 
may enter Opening Only (``OPG'') eQuotes,\24\ Auction or Cancel 
(``AOC'') eQuotes,\25\ Standard quotes,\26\ Opening Orders (``OPG 
Orders''),\27\ AOC Orders \28\ and limit orders during the Imbalance 
Timer. Other Exchange Members may enter OPG Orders, AOC Orders and 
other order types (except those order types not valid during the 
Opening Process, as described in Rule 516) during the Imbalance 
Timer.\29\ If, at the conclusion of the timer, quotes and orders 
submitted during the Imbalance Timer, or other changes to the ABBO, 
would not allow the entire imbalance amount to trade at the Exchange at 
or within the EQR without trading at a price inferior to the ABBO, the 
System will send a new system imbalance message to Exchange Members and 
initiate a route timer for routable Public Customer orders not to 
exceed one second. If, during the route timer, interest is received by 
the System which would allow all interest to trade on the System (i.e., 
there is no longer an imbalance) at the opening price without trading 
at a price inferior to other markets, the System will trade and the 
route timer will end.\30\ The System may repeat the imbalance process 
up to three times (as established by the Exchange).\31\ Following 
completion of the third imbalance process, if there is an opening 
transaction, any unexecuted contracts from the imbalance not traded or 
routed will be cancelled back to the entering Member if the price for 
those contracts crosses the opening price, in effect cancelling that 
must fill interest.\32\ That is the completion of the Exchange's 
standard, existing Opening Process.
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    \20\ The term ``NBBO'' means the national best bid or offer as 
calculated by the Exchange based on market information received by 
the Exchange from OPRA. See Exchange Rule 100.
    \21\ See Exchange Rule 503(f)(2)(vii).
    \22\ See Exchange Rule 503(f)(2)(vii)(A).
    \23\ The term ``Market Makers'' refers to ``Lead Market 
Makers'', ``Primary Lead Market Makers'' and ``Registered Market 
Makers'' collectively. See Exchange Rule 100.
    \24\ An opening only or ``OPG'' eQuote is a quote that can be 
submitted by a Market Maker only during the Opening as set forth in 
Rule 503. OPG eQuotes will automatically expire at the end of the 
Opening Process. See Exchange Rule 517(a)(2)(iii).
    \25\ An Auction or Cancel or ``AOC'' eQuote is a quote submitted 
by a Market Maker to provide liquidity in a specific Exchange 
process with a time in force that corresponds with the duration of 
that event and will automatically expire at the end of that event. 
See Exchange Rule 517(a)(2)(ii).
    \26\ A Standard quote is a quote submitted by a Market Maker 
that cancels and replaces the Market Maker's previous Standard 
quote, if any. See Exchange Rule 517(a)(1).
    \27\ An Opening or ``OPG'' Order is an order that is valid only 
for the opening process. See Exchange Rule 516(h).
    \28\ An Auction-or-Cancel or ``AOC'' order is a limit order used 
to provide liquidity during a specific Exchange process with a time 
in force that corresponds with that event. See Exchange Rule 
516(b)(4).
    \29\ See supra note 10.
    \30\ See Exchange Rule 503(f)(2)(vii)(B)(2).
    \31\ See Exchange Rule 503(f)(2)(vii)(B)(4).
    \32\ See Exchange Rule 503(f)(2)(vii)(B)(5).
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    Now, where an imbalance exists in constituent options and the final 
imbalance process has been conducted as part of the Exchange's 
standard, existing Opening Process, instead of cancelling that must 
fill interest back to the entering Member, the Exchange conducts the 
SSIP,\33\ where the Exchange will satisfy that must fill interest. The 
Exchange does not want to cancel any must fill interest, as this 
liquidity could represent previously hedged interest that must be 
unwound.
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    \33\ See Exchange Rule 503(f)(2)(vii)(B)(5)(a).
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    The SSIP is employed to satisfy all liquidity identified as must 
fill which is creating the imbalance, referred to as the must fill 
imbalance. The SSIP is an iterative process that is designed to 
determine a price at which all must fill imbalance interest can be 
satisfied.\34\ In the SPIKES Special Settlement Auction, in addition to 
any order types that may be regularly accepted by the Exchange, the 
Exchange will also accept settlement auction only orders (``SAO 
Orders'') and settlement auction only eQuotes (``SAO eQuotes'') (SAO 
Orders and SAO eQuotes are collectively referred to as ``SAOs'') at any 
time after the opening of the Live Order Window (``LOW'') \35\ and the 
Live Quote Window (``LQW''),\36\ respectively. SAOs are specific order 
types that allow a Member to voluntarily tag such order as a SPIKES 
strategy order, defined below. All orders for participation in the 
SPIKES Special Settlement Auction that are related to positions in, or 
a trading strategy involving, SPIKES Index options (``SPIKES strategy 
orders''), and any change to or cancellation of any such order: (i) 
Must be received prior to the applicable SPIKES strategy order cut-off 
time for the constituent option series, as determined by the Exchange, 
which may be no earlier than the opening of the LOQ or the LQW, and no 
later than the opening of trading in the series. The

[[Page 11350]]

Exchange will announce all determinations regarding changes to the 
applicable SPIKES strategy order cut-off time via Regulatory Circular 
at least one day prior to implementation (however the Exchange 
anticipates initially establishing the cut-off time at 9:20 a.m. 
Eastern); and (ii) may not be cancelled or modified after the 
applicable SPIKES strategy order cut-off time, unless the SPIKES 
strategy order is not executed in the SPIKES Special Settlement Auction 
and the cancellation or modification is submitted after the SPIKES 
Special Settlement Auction is concluded (provided that any such SPIKES 
strategy order may be modified or cancelled after the applicable SPIKES 
strategy order cut-off time and prior to the applicable non-SPIKES 
strategy order cut-off time in order to correct a legitimate error, in 
which case the Member submitting the change or cancellation will 
prepare and maintain a memorandum setting forth the circumstances that 
resulted in the change or cancellation and will file a copy of the 
memorandum with the Exchange no later than the next business day in a 
form and manner prescribed by the Exchange).
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    \34\ See Exchange Rule 503, Interpretations and Policies .03.
    \35\ The Exchange notes that the current Live Order Window opens 
at 7:30 a.m.
    \36\ The Exchange notes that the current Live Quote Window 
setting opens at 9:25 a.m., however the Exchange plans to open the 
Live Quote Window for the SPIKES Special Settlement Auction at 8:30 
a.m.
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    In general, the Exchange considers orders to be SPIKES strategy 
orders for purposes of Rule 503 Interpretation and Policy .03, if the 
orders possess the following three characteristics: (A) Are for options 
with the expiration that will be used to calculate the exercise or 
final settlement value of the applicable volatility index option 
contract; (B) are for options spanning the full range of strike prices 
for the appropriate expiration for options that will be used to 
calculate the exercise or final settlement value of the applicable 
volatility index option contract, but not necessarily every available 
strike price; and (C) are for put options with strike prices less than 
the ``at-the-money'' strike price and for call options with strike 
prices greater than the ``at-the-money'' strike price. They may also be 
for put and call options with ``at-the-money'' strike prices.
    Whether certain orders are SPIKES strategy orders for purposes of 
Interpretation and Policy .03 depends upon specific facts and 
circumstances. The Exchange may also deem order types other than those 
provided above as SPIKES strategy orders if the Exchange determines 
that to be the case based upon the applicable facts and circumstances.
    These requirements are substantially similar to Cboe's requirements 
for ``strategy orders'' participating in the VIX settlement 
auction.\37\
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    \37\ See Cboe Rule 6.2, Hybrid Opening (and Sometimes Closing) 
System (``HOSS''), Interpretations and Policies .01, Modified 
Opening Procedure for Series Used to Calculate the Exercise/Final 
Settlement Values of Volatility Indexes.
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    Market participants that actively trade SPIKES options may hedge 
their positions with SPY option series that will also be used to 
calculate the SPIKES exercise settlement/final settlement value. Market 
participants holding hedged SPIKES options positions may trade out of 
their SPY option series on the relevant SPIKES expiration/final 
settlement date. Specifically, market participants holding short, 
hedged SPIKES options could liquidate that hedge by selling their SPY 
options series, while traders holding long, hedged SPIKES options could 
liquidate their hedge by buying SPY option series. In order to seek 
convergence with the SPIKES exercise/final settlement value, these 
market participants may liquidate their hedges by submitting SPIKES 
strategy orders in the appropriate SPY option series during the SPIKES 
Special Settlement Auction on the SPIKES expiration/final settlement 
date.
    The SPIKES strategy order cut-off time exists because trades to 
liquidate hedges can contribute to an order imbalance during the SPIKES 
Special Settlement Auction in SPY option series on expiration/final 
settlement dates. For example, traders liquidating hedges could 
predominantly be on one side of the market and those market 
participants' orders may create buy or sell order imbalances during the 
SPIKES Special Settlement Auction in SPY option series on expiration/
final settlement dates. As a result of having a SPIKES strategy order 
cut-off time in place, the Exchange has created a defined window to 
encourage participation in the SPIKES Special Settlement Auction among 
market participants who may wish to place off-setting orders against 
imbalances to which SPIKES strategy orders may have contributed. 
Additionally, by precluding the modification or cancellation of SPIKES 
strategy orders from occurring after the cut-off time, the Exchange is 
ensuring that the order book reflects bona-fide interest for execution, 
and is a feature designed to prevent manipulation of the final 
settlement price.
    Next, to begin the SSIP, which occurs during the SPIKES Special 
Settlement Auction and is done to resolve imbalances, the System 
broadcasts a system imbalance message to all subscribers of the 
Exchange's relevant data feed and begins an SSIP Imbalance Timer, the 
duration of which shall be determined by the Exchange, not to exceed 
ten seconds, and shall be communicated via Regulatory Circular. During 
the SSIP Imbalance Timer, the System accepts all quote and order types 
supported during the standard Opening Process. Next, the System 
evaluates the must fill imbalance and adjusts the EQR by a defined 
amount by appending to the EQR (adding to offers or subtracting from 
bids) the EQR value (as determined by the Exchange and communicated via 
Regulatory Circular).\38\ During the SSIP, the allowable EQR is 
increased .5 times the EQR value upon each iteration of the SSIP. The 
SSIP is repeated until a price is reached at which there is no 
remaining must fill imbalance.
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    \38\ See supra note 14.
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    Once there is no remaining must fill imbalance, SAOs, AOC Orders, 
AOC eQuotes, OPG Orders, and OPG eQuotes submitted into the SPIKES 
Special Settlement Auction are cancelled. Any unfilled day limit orders 
and GTC orders that are priced at the Opening Price are placed on the 
Book and managed by the System.
    As previously discussed, the System assigns an SRP to each 
constituent option to facilitate the calculation of the final 
settlement price of the Index. If the System opens the constituent 
option with a trade, the System assigns the constituent option an SRP 
equal to the trade price in that option. If there is no locking or 
crossing interest and the System opens the constituent option without a 
trade, and the bid-ask spread is at or within a range as defined by the 
Exchange in an SRP opening width table and communicated via Regulatory 
Circular, the System assigns the constituent option an SRP equal to the 
midpoint of the bid and ask prices. If the bid-ask spread is not within 
a range as defined in the SRP opening width table, the System conducts 
an additional process to determine the SRP of the constituent option, 
as follows.
    First, the System starts a settlement reference price timer 
(``SRPT'') (the duration of which shall be defined by the Exchange not 
to exceed sixty seconds and shall be communicated via Regulatory 
Circular). If, during the SRPT, there is a trade on the Exchange, the 
System will set the SRP equal to the trade price. If, during the SRPT, 
the bid-ask spread changes so that it is within a range defined in the 
settlement price opening width table, the System will set the SRP equal 
to the midpoint of the bid and ask price.

[[Page 11351]]

    If the SRPT expires, the System will set the SRP equal to the 
Reference Price (the current price of that option utilizing the cash 
index calculation formula, described above) of the constituent option 
if it is equal to or inside the MBBO.\39\ If the Reference Price is 
non-zero and less than the Exchange's bid, then the System will set the 
SRP equal to the Exchange's bid. If the Reference Price is non-zero and 
greater than the Exchange's ask, then the System will set the SRP equal 
to the Exchange's ask. If the Reference Price is zero and if one or 
both adjacent constituent options have a non-zero SRP, the constituent 
option will be excluded from the calculation. If the Reference Price is 
zero and there are multiple adjacent constituent options with a current 
Reference Price of zero, the System will use the midpoint of the NBBO 
for the SRP if the NBBO bid-ask spread is at or within a range defined 
in the settlement price opening width table. If the NBBO bid-ask spread 
is not within a range defined in the settlement price opening width 
table, the System will wait for either a trade, or a bid-ask spread 
that is within a range defined in the settlement price opening width 
table. Once all constituent options have been assigned an SRP, the 
System performs the final settlement price calculation of the Index.
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    \39\ The term ``MBBO'' means the best bid or offer on the 
Exchange. See Exchange Rule 100.
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    In the options market, it is important for Market Makers to provide 
liquidity to execute against orders submitted by other market 
participants. Pursuant to Rule 603, a Market Maker has general 
obligations to, among other things, engage (to a reasonable degree 
under existing circumstances) in dealings for the Market Maker's own 
account when there exists, or it is reasonably anticipated that there 
will exist, a lack of price continuity, a temporary disparity between 
the supply of and demand for an option (i.e., an imbalance), to compete 
with other Market Makers to improve markets in its appointed classes, 
and to update market quotations in response to changed market 
conditions in its appointed classes. Certain types of Market Makers 
have obligations to facilitate resolution of imbalances and make 
competitive markets, and the proposed rule change is consistent with 
those obligations.\40\ As described above, the entry of SPIKES strategy 
orders may lead to order imbalances in the option series used to 
determine the final settlement value for expiring SPIKES Index options. 
In order for the Exchange's system to open these series for trading 
(i.e., to resolve order imbalances) and achieve the most competitive 
pricing in these series, Market Maker participation in the SPIKES 
Special Settlement Auction is important for adding liquidity and 
promoting a fair and orderly opening and settlement process.
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    \40\ See, e.g., Rules 603 and 604 (describing the obligations of 
Primary Lead Market Makers and Lead Market Makers).
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    The Exchange understands that some Market Makers may hesitate to 
provide liquidity that could resolve order imbalances, out of a concern 
that adding such liquidity after the SPIKES strategy order cut-off time 
could be deemed either a new SPIKES strategy order or a modification to 
or cancellation of an existing SPIKES strategy order. As a result, this 
perceived risk may lead to reduced liquidity and may exacerbate the 
time it takes to open a series at a competitive price.\41\ The proposed 
rule change encourages Market Makers to provide liquidity on SPIKES 
Index options settlement days by explicitly stating in Rule 503, 
Interpretations and Policies .03, that bona fide Market Maker activity 
does not constitute either a SPIKES strategy order or a modification to 
or cancellation of a previously submitted SPIKES strategy order during 
the SPIKES Special Settlement Auction. The Exchange believes Market 
Maker liquidity is important to the resolution of order imbalances on 
SPIKES Index settlement days and to the orderly opening of series on 
such day, due to the fact that a series cannot open if there is a 
market order imbalance. Also, Market Maker liquidity is desirable to 
advance the opening of series at competitive prices on SPIKES Index 
settlement days. The Exchange's system also relies on Market Maker 
liquidity to open series for trading. Pursuant to Rule 503, the 
Exchange's system will not open a series for trading if there are no 
Market Maker quotes present. Additionally, the width of the best Market 
Maker quotes on the Exchange must be within a certain price range for 
the System to open a series for trading. The Exchange believes the 
proposed rule change will incentivize Market Maker liquidity on SPIKES 
Index settlement days by explicitly stating in the Rules that providing 
such liquidity will not be deemed to constitute either submission of a 
SPIKES strategy order or modification or cancellation of a previously 
submitted SPIKES strategy order.
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    \41\ See Rules 503(f).
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    Specifically, proposed Rule 503, Interpretations and Policies 
.03(e) states a Market Maker with an appointment in a class with 
constituent option series may submit bids and offers in those series 
for bona fide market making purposes in accordance with Rule 603 and 
the Securities Exchange Act of 1934 (the ``Act''), for its market maker 
account prior to the open of trading for participation in the SPIKES 
Special Settlement Auction. The Exchange will deem these bids and 
offers to be non-SPIKES strategy orders, and will not deem them to be 
changes to or cancellations of previously submitted SPIKES strategy 
orders, if:
    (i) The Member with which the Market Maker is affiliated has 
established, maintains, and enforces reasonably designed written 
policies and procedures (including information barriers, as 
applicable), taking into consideration the nature of the Member's 
business and other facts and circumstances, to prevent the misuse of 
material nonpublic information (including the submission of SPIKES 
strategy orders); and
    (ii) when submitting these bids and offers, the Market Maker has no 
actual knowledge of any previously submitted SPIKES strategy orders.
    In other words, if a Market Maker submits bids or offers in 
constituent options on a SPIKES Index option settlement day, and if 
such bids and offers are for its market maker account and submitted for 
purposes of its market making activities on the Exchange (including in 
accordance with Market Maker obligations, such as to offset imbalances 
or provide competitive pricing), the Market Maker may submit those bids 
and offers any time prior to the open of trading, including both before 
and after the strategy order cut-off time. As long as the Member has 
appropriate procedures in place both to prevent the Market Maker from 
knowing about the submission of SPIKES strategy orders by other persons 
within the Member organization with which it is affiliated, and to 
prevent other persons from knowing about the Market Maker's submission 
of bids and offers, the Exchange will not review such bids and offers 
for either potential impermissible entry of SPIKES strategy orders, or 
cancellations of or modifications to previously submitted SPIKES 
strategy orders.
    Bona fide Market Maker activity is generally activity consistent 
with Market Maker requirements under the Act and MIAX Options Rules:
     Pursuant to the Act, a market maker is a specialist 
permitted to act as a dealer, any dealer acting in the capacity of 
block positioner, and any dealer who, with respect to a security, holds 
himself out (by entering quotations in an inter-dealer communications 
system or otherwise) as being willing to buy and

[[Page 11352]]

sell such security for his own account on a regular or continuous 
basis.\42\
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    \42\ 15 U.S.C. 78c(a)(38); see also 12 U.S.C. 1851(d)(1)(B) 
(market making is intended to service ``the reasonably expected 
near-term demand'' of other parties).
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     Pursuant to Rule 603, a Market Maker appointed to a class 
must, among other things, engage to a reasonable degree under existing 
circumstances in dealings for the Market Maker's own account when there 
exists, or it is reasonably anticipated that there will exist, a lack 
of price continuity, a temporary disparity between the supply of and 
demand for an option (i.e., an imbalance), to compete with other Market 
Makers to improve markets in its appointed classes, and to update 
market quotations in response to changed market conditions in its 
appointed classes. Additionally, pursuant to Rule 603, all quotes a 
Market Maker submits, including prior to the opening, must comply with 
all requirements including applicable bid-ask differential and minimum 
size requirements.\43\ Rule 604 imposes an ongoing continuous quoting 
requirement on Market Makers that applies through the opening of 
trading, as well as during regular trading hours.
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    \43\ Rule 603(b)(4) permits the Exchange to set different 
minimum quote size and bid-ask differential requirements for opening 
quotes as those for intraday quotes.
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     In addition to these obligations, Market Makers also 
effect transactions for the purpose of hedging, reducing risk of, 
rebalancing, or liquidating their open positions.
    As noted above, the Exchange implemented the SPIKES strategy order 
cut-off time for the operational purpose of providing market 
participants with time to enter additional orders and quotes to offset 
any such imbalances prior to the opening of these series.\44\ The 
Exchange's surveillance procedures to determine market participants' 
compliance with the SPIKES strategy order cut-off time are separate and 
distinct from the Exchange's surveillance procedures to identify 
potentially manipulative behavior. Therefore, from the Exchange's 
perspective, whether a Market Maker's bids and offers constitute SPIKES 
strategy orders is distinct from whether the submitting Market Maker is 
attempting to engage in manipulative behavior. The classification of 
bona fide Market Maker activity as non-SPIKES strategy orders will have 
no impact on the Exchange's surveillance procedures to detect activity 
intended to manipulate the settlement value or violate other Rules. 
Additionally, all Market Maker bids and offers, even though not 
considered SPIKES strategy orders pursuant to the proposed rule change, 
will continue to be subject to Exchange surveillance procedures that 
monitor trading in the option series used to calculate SPIKES Index 
settlement values on expiration dates, as well as surveillance 
procedures that monitor Market Maker activity for compliance with 
Market Maker obligations in the Rules. This activity will merely be 
excepted from Exchange surveillance procedures determining compliance 
with the operational SPIKES strategy order cut-off time.
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    \44\ See Exchange Rule 503, Interpretations and Policies .03.
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    The Exchange believes Market Makers are more likely to interact 
with and resolve order imbalances on SPIKES settlement days if they can 
be confident that their bids and offers submitted for that purpose will 
not be deemed SPIKES strategy orders or cancellations of or 
modifications to previously submitted SPIKES strategy orders. As 
discussed above, the purpose of the SPIKES strategy order cut-off time 
is to provide market participants, including Market Makers, with 
sufficient time to address imbalances created by SPIKES strategy 
orders. Additionally, as discussed above, pursuant to Rule 503(f), 
whether a series opens depends on the presence of Market Maker quotes 
at prices no wider than an acceptable price range. Market Makers are an 
important source of liquidity on the Exchange, and also have various 
obligations with which they must comply. The proposed rule change will 
provide a Market Maker with an opportunity to provide liquidity on 
SPIKES Index settlement dates and to satisfy their Market Maker 
obligations, without concern that the Exchange may consider such 
activity to constitute the placing of, or cancellations to or 
modifications of, SPIKES strategy orders, even if the Member with which 
the Market Maker is affiliated submitted a SPIKES strategy order.
    The purpose of this proposed change is to accommodate the fact that 
the Member with which the Market Maker is affiliated may submit a 
SPIKES strategy order while the Market Maker may also be submitting 
bids and offers to accommodate a fair and orderly opening process, by 
among other things, resolving market order imbalances and submitting 
competitively priced bids and offers.
    For example, a Member may have a SPY Market Maker and a separate 
volatility trading desk. During the SPIKES Special Settlement Auction 
on a SPIKES Index settlement day, the trading strategy of the SPY 
Market Maker is to provide markets in SPY options (both before and 
after the SPIKES strategy order cut-off time), and the trading strategy 
of the volatility trading desk may be to replicate Vega exposure by 
replacing its expiring SPIKES options positions with positions in the 
SPY constituent series. To replicate its Vega exposure, the volatility 
trading desk may enter SPIKES strategy orders prior to the SPIKES 
strategy order cut-off time. These are separate and distinct trading 
strategies. If the Member has reasonable policies and procedures in 
place such that the SPY Market Maker has no knowledge of the volatility 
trading desk's submission of SPIKES strategy orders, and that the 
volatility trader has no knowledge of the SPY Market Maker's submission 
of bids and offers, the Exchange believes it is appropriate for the SPY 
Market Maker's bids and offers to not be deemed SPIKES strategy orders, 
or the modification to or cancellation of the SPIKES strategy order 
submitted by its affiliated volatility trading desk.
    The Exchange does not believe it is necessary to restrict the bona 
fide market making activities of a Market Maker within its appointed 
classes due to other unrelated trading activities that may involve 
submissions of orders deemed to be SPIKES strategy orders of which the 
Market Maker has no actual knowledge. The proposed rule change 
expressly provides that activity related to a Market Maker's market 
making activity in an appointed class will not constitute the 
submission of a SPIKES strategy order or the cancellation of or 
modification to a previously submitted SPIKES strategy order.
    The proposed rule change makes clear that a Market Maker's 
submission of bids and offers for bona fide market making purposes in 
constituent series is permitted on SPIKES Index settlement days through 
the open of trading in the same manner as it is permitted in all series 
in its appointed classes at all other times. This will encourage Market 
Makers to continue to submit bids and offers through the open, despite 
other trading activity within the Member organization. This will also 
ensure Market Makers can respond to imbalances and update their quotes 
\45\ in accordance with their market making dealings and obligations. 
The Exchange believes this will contribute to price transparency and 
liquidity in the option series at the open, and thus will promote a 
fair and orderly opening on SPIKES Index settlement days. The

[[Page 11353]]

Exchange continuously evaluates the SPIKES Special Settlement Auction 
to identify potential enhancements, and intends to modify the procedure 
as it deems appropriate to contribute to a fair and orderly opening 
process. A fair and orderly opening in these series benefits all market 
participants who trade in the SPIKES Index options and the constituent 
options.
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    \45\ As noted above, the Exchange's system will not open a 
series if there is no quote of if the opening quote or price is 
outside an acceptable price range.
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    The proposed rule change would not eliminate a Market Maker's 
requirements to abide by Exchange Rules 301 (Just and Equitable 
Principles of Trade), 318 (Manipulation), and 303 (Prevention of the 
Misuse of Material Nonpublic Information). The requirement in the 
proposed rule change that the Member with which a Market Maker is 
affiliated must establish, maintain, and enforce policies and 
procedures reasonably designed to ensure the Market Maker will not have 
knowledge of the submission of SPIKES strategy orders is consistent 
with requirements of Rule 303. The Exchange will continue to conduct 
surveillance to monitor trading in the option series used to calculate 
the SPIKES Index settlement values on expiration dates, including but 
not limited to, monitoring entry of SPIKES strategy orders, or 
modifications to SPIKES strategy orders, following the cut-off time, as 
well as compliance with other Rules.
    The proposed rule change also makes a non-substantive change to 
change paragraph numbering resulting from the addition of this proposed 
rule.
    Additionally, the proposed rule changes modifies Interpretations 
and Policies .03(c) to Rule 503, to state that ``SPIKES strategy 
orders'' means all orders for participation in the SPIKES Special 
Settlement Auction that are related to positions in, or a trading 
strategy involving, expiring SPIKES Index options. The addition of the 
word ``expiring'' is a codification of the Exchange's interpretation of 
the term SPIKES strategy order. As discussed above, to replicate 
expiring SPIKES Index options on their expiration dates with options 
portfolios, market participants generally submit SPIKES strategy orders 
to participate in the SPIKES Special Settlement Auction on SPIKES Index 
settlement days. The addition of the word ``expiring'' is consistent 
with the introductory paragraph in Interpretations and Policies .03 to 
Rule 503, which states that the SPIKES Special Settlement Auction 
applies to series used to calculate the exercise/final settlement value 
of the SPIKES Index for expiring options contracts, and demonstrates 
the rule is meant to refer to orders that relate to strategies 
involving expiring SPIKES Index options. Therefore, the proposed 
codification is consistent with this general practice, as well as the 
current rule.
2. Statutory Basis
    The Exchange believes that its proposed rule change is consistent 
with Section 6(b) of the Act \46\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act \47\ in particular, in that it 
is designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to and 
perfect the mechanisms of a free and open market and a national market 
system and, in general, to protect investors and the public interest. 
Additionally, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5) requirement that the rules of an 
exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \46\ 15 U.S.C. 78f(b).
    \47\ 15 U.S.C. 78f(b)(5).
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    In particular, the Exchange believes the proposed change will 
increase liquidity on SPIKES Index settlement dates, as it will remove 
an impediment that may discourage Market Makers from submitting bids 
and offers to offset imbalances and update the prices of their quotes 
in response to changing market conditions prior to the open. The 
Exchange believes this additional liquidity may contribute to a fair 
and orderly opening by increasing execution opportunities, reducing 
imbalances in constituent options, and increasing the presence of 
quotes within the acceptable price range, which would benefit all 
market participants who trade in the SPIKES Index options and the 
constituent options. The Exchange does not believe it is necessary to 
restrict the bona fide market maker activities of a Market Maker due to 
other unrelated trading activity by the Member with which it is 
affiliated. The Exchange notes that the proposed rule change would not 
impact a Market Maker's requirements to abide by Exchange Rules 301 
(Just and Equitable Principles of Trade), 318 (Manipulation), and 303 
(Prevention of the Misuse of Material Nonpublic Information). The 
requirement in the proposed rule change that the Member with which a 
Market Maker is affiliated must establish, maintain, and enforce 
policies and procedures reasonably designed to ensure the Market Maker 
will not have knowledge of the submission of SPIKES strategy orders is 
consistent with requirements of Rule 303. As a result, the Exchange 
does not believe that the proposed rule change will be burdensome on 
Market Makers.
    The Exchange believes the proposed rule change will contribute to 
price transparency and liquidity in the option series at the open, and 
thus a fair and orderly opening on SPIKES Index settlement days. A fair 
and orderly opening in these series benefits all market participants 
who trade in the SPIKES Index options and the constituent options.
    The proposed rule change to add the term ``expiring'' to the 
definition of SPIKES strategy order is merely a codification of a 
current Exchange interpretation and is consistent with the definition 
of constituent options in the current rule.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. Because of the importance of 
Market Maker liquidity in the options market and the Exchange's need 
for competitive quotes to open a series, the Exchange believes it is 
appropriate for Market Makers' bids and offers prior to the opening of 
trading, including after the SPIKES strategy order cut-off time, not to 
be considered SPIKES strategy orders, or cancellations to or 
modifications of previously submitted SPIKES strategy orders. As 
discussed above, Market Makers are subject to various obligations under 
the Rules, and the proposed rule change provides them with the ability 
to satisfy these obligations without the risk of their market making 
activity being deemed to constitute SPIKES strategy orders or 
modifications to or cancellations of SPIKES strategy orders. The 
requirement in the proposed rule change that the Member with which a 
Market Maker is affiliated must establish, maintain, and enforce 
policies and procedures is reasonably designed to ensure the Market 
Maker will not have knowledge of the submission of SPIKES strategy 
orders and is consistent with the requirements of Rule 303. As a 
result, the Exchange does not believe the proposed rule change will be 
burdensome on Market Makers. The Exchange does not believe it is 
necessary to restrict the bona fide market maker activities of a Member 
due to its other unrelated trading activities. The proposed rule change 
has

[[Page 11354]]

no impact on intermarket competition, as it applies to orders and 
quotes submitted to the SPIKES Special Settlement Auction the Exchange 
conducts prior to the open of trading in certain classes.
    The Exchange believes that the proposed rule change will relieve 
any burden on, or otherwise promote, competition. The Exchange believes 
the proposed rule change will contribute to price transparency and 
liquidity in constituent options at the open on SPIKES Index settlement 
days, and thus to a fair and orderly opening on those days. A fair and 
orderly opening, and increased liquidity in these series benefits all 
market participants who trade in the SPIKES Index options and the 
constituent options.
    The proposed rule change to add the term ``expiring'' to the 
definition of SPIKES strategy orders has no impact on competition, as 
it is merely a codification of a current Exchange interpretation and is 
consistent with the definition of constituent options in the current 
rule.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days after the date of the filing, or such 
shorter time as the Commission may designate, it has become effective 
pursuant to 19(b)(3)(A) of the Act \48\ and Rule 19b-4(f)(6) \49\ 
thereunder.
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    \48\ 15 U.S.C. 78s(b)(3)(A).
    \49\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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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.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-MIAX-2019-12 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-MIAX-2019-12. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-MIAX-2019-12 and should be submitted on 
or before April 16, 2019.
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    \50\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\50\
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-05696 Filed 3-25-19; 8:45 am]
 BILLING CODE 8011-01-P