Document ID: SEC-2012-0510-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2012-03-30T04:00Z

[Federal Register Volume 77, Number 62 (Friday, March 30, 2012)]
[Notices]
[Pages 19401-19405]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-7629]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66656; File No. SR-NYSEArca-2012-22]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Proposed Rule Change Amending NYSE Arca Equities Rule 7.45 Adding a 
New Paragraph (d) That Addresses the Authority of the Exchange or 
Archipelago Securities LLC To Cancel Orders When a Technical or Systems 
Issue Occurs and Describe the Operation of an Error Account for Arca 
Securities

March 26, 2012.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on March 15, 2012, NYSE Arca, Inc. (the ``Exchange'' or 
``NYSE Arca'') filed with

[[Page 19402]]

the Securities and Exchange Commission (the ``Commission'') the 
proposed rule change as described in Items I and II below, which Items 
have been prepared by the self-regulatory organization. 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\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange proposes to amend NYSE Arca Equities Rule 7.45 by 
adding a new paragraph (d) that addresses the authority of the Exchange 
or Archipelago Securities LLC (``Arca Securities'') to cancel orders 
when a technical or systems issue occurs and to describe the operation 
of an error account for Arca Securities. The text of the proposed rule 
change is available at the Exchange, the Commission's Public Reference 
Room, and www.nyse.com.

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

    In its filing with the Commission, the self-regulatory organization 
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 those 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 parts of such statements.

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

1. Purpose
    The Exchange proposes to amend NYSE Arca Equities Rule 7.45 by 
adding a new paragraph (d) that addresses the authority of the Exchange 
or Arca Securities to cancel orders when a technical or systems issue 
occurs and to describe the operation of an error account for Arca 
Securities.\4\
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    \4\ Arca Securities is a facility of the Exchange. Accordingly, 
under NYSE Arca Equities Rule 7.45, the Exchange is responsible for 
filing with the Commission rule changes and fees relating to Arca 
Securities' functions. In addition, the Exchange is using the phrase 
``Arca Securities or the Exchange'' in this rule filing to reflect 
the fact that a decision to take action with respect to orders 
affected by a technical or systems issue may be made in the capacity 
of Arca Securities or the Exchange depending on where those orders 
are located at the time of that decision.
    From time to time, the Exchange also uses non-affiliate third-
party broker-dealers to provide outbound routing services (i.e., 
third-party Routing Brokers). In those cases, orders are submitted 
to the third-party Routing Broker through Arca Securities, the 
third-party Routing Broker routes the orders to the routing 
destination in its name, and any executions are submitted for 
clearance and settlement in the name of Arca Securities so that any 
resulting positions are delivered to Arca Securities upon 
settlement. As described above, Arca Securities normally arranges 
for any resulting securities positions to be delivered to the ETP 
Holder that submitted the corresponding order to the Exchange. If 
error positions (as defined in proposed Rule 7.45(d)(2)) result in 
connection with the Exchange's use of a third-party Routing Broker 
for outbound routing, and those positions are delivered to Arca 
Securities through the clearance and settlement process, Arca 
Securities would be permitted to resolve those positions in 
accordance with proposed Rule 7.45(d). If the third-party Routing 
Broker received error positions in connection with its role as a 
routing broker for the Exchange, and the error positions were not 
delivered to Arca Securities through the clearance and settlement 
process, then the third-party Routing Broker would resolve the error 
positions itself, and Arca Securities would not be permitted to 
accept the error positions, as set forth in proposed Rule 
7.45(d)(2)(B).
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    Arca Securities is the approved routing broker of the Exchange, 
subject to the conditions listed in NYSE Arca Equities Rule 7.45. The 
Exchange relies on Arca Securities to provide outbound routing services 
from itself to routing destinations of Arca Securities (``routing 
destinations'').\5\ When Arca Securities routes orders to a routing 
destination, it does so by sending a corresponding order in its own 
name to the routing destination. In the normal course, routed orders 
that are executed at routing destinations are submitted for clearance 
and settlement in the name of Arca Securities, and Arca Securities 
arranges for any resulting securities positions to be delivered to the 
ETP Holder that submitted the corresponding order to the Exchange. 
However, from time to time, the Exchange and Arca Securities encounter 
situations in which it becomes necessary to cancel orders and resolve 
error positions.\6\
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    \5\ The Exchange has also been approved to receive inbound 
routes of equities orders by Arca Securities from the New York Stock 
Exchange LLC (``NYSE'') and NYSE Amex LLC (``NYSE Amex''). See NYSE 
Arca Equities Rule 7.45(c).
    \6\ The examples described in this filing are not intended to be 
exclusive. Proposed NYSE Arca Equities Rule 7.45(d) would provide 
general authority for the Exchange or Arca Securities to cancel 
orders in order to maintain fair and orderly markets when technical 
and systems issues are occurring, and Rule 7.45(d) also would set 
forth the manner in which error positions may [sic] handled by the 
Exchange or Arca Securities. The proposed rule change is not limited 
to addressing order cancellation or error positions resulting only 
from the specific examples described in this filing.
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Examples of Circumstances That May Lead to Canceled Orders
    A technical or systems issue may arise at Arca Securities, a 
routing destination, or the Exchange that may cause the Exchange or 
Arca Securities to take steps to cancel orders if the Exchange or Arca 
Securities determines that such action is necessary to maintain a fair 
and orderly market. The examples set forth below describe some of the 
circumstances in which the Exchange or Arca Securities may decide to 
cancel orders.

    Example 1. If Arca Securities or a routing destination 
experiences a technical or systems issue that results in Arca 
Securities not receiving responses to immediate or cancel (``IOC'') 
orders that it sent to the routing destination, and that issue is 
not resolved in a timely manner, Arca Securities or the Exchange 
would seek to cancel the routed orders affected by the issue.\7\ For 
instance, if Arca Securities experiences a connectivity issue 
affecting the manner in which it sends or receives order messages to 
or from routing destinations, it may be unable to receive timely 
execution or cancellation reports from the routing destinations, and 
Arca Securities or the Exchange may consequently seek to cancel the 
affected routed orders. Once the decision is made to cancel those 
routed orders, any cancellation that an ETP Holder submitted to the 
Exchange on its initial order during such a situation would be 
honored.\8\
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    \7\ In a normal situation (i.e., one in which a technical or 
systems issue does not exist), Arca Securities should receive an 
immediate response to an IOC order from a routing destination, and 
would pass the resulting fill or cancellation on to the ETP Holder. 
After submitting an order that is routed to a routing destination, 
if an ETP Holder sends an instruction to cancel that order, the 
cancellation is held by the Exchange until a response is received 
from the routing destination. For instance, if the routing 
destination executes that order, the execution would be passed on to 
the ETP Holder and the cancellation instruction would be 
disregarded.
    \8\ If an ETP Holder did not submit a cancellation to the 
Exchange, however, that initial order would remain ``live'' and thus 
be eligible for execution or posting on the Exchange, and neither 
the Exchange nor Arca Securities would treat any execution of that 
initial order or any subsequent routed order related to that initial 
order as an error.
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    Example 2. If the Exchange experiences a systems issue, the 
Exchange may take steps to cancel all outstanding orders affected by 
that issue and notify affected ETP holders of the cancellations. In 
those cases, the Exchange would seek to cancel any routed orders 
related to the ETP holders' initial orders.
Examples of Circumstances That May Lead to Error Positions
    In some instances, the technical or systems issue at Arca 
Securities, a routing destination, the Exchange, or a non-affiliate 
third-party Routing Broker may also result in Arca Securities acquiring 
an error position that it must resolve. The examples set forth below 
describe some of the circumstances in which error positions may arise.

    Example A. Error positions may result from routed orders that 
the Exchange or Arca

[[Page 19403]]

Securities attempts to cancel but that are executed before the 
routing destination receives the cancellation message or that are 
executed because the routing destination is unable to process the 
cancellation message. Using the situation described in Example 1 
above, assume that the Exchange seeks to cancel orders routed to a 
routing destination because it is not receiving timely execution or 
cancellation reports from the routing destination. In such a 
situation, Arca Securities may still receive executions from the 
routing destination after connectivity is restored, which it would 
not then allocate to ETP Holders because of the earlier decision to 
cancel the affected routed orders. Instead, Arca Securities would 
post those positions into its error account and resolve the 
positions in the manner described below.
    Example B. Error positions may result from an order processing 
issue at a routing destination. For instance, if a routing 
destination experienced a systems problem that affects its order 
processing, it may transmit back a message purporting to cancel a 
routed order, but then subsequently submit an execution of that same 
order (i.e., a locked-in trade) to The Depository Trust & Clearing 
Corporation (``DTCC'') for clearance and settlement. In such a 
situation, the Exchange would not then allocate the execution to the 
ETP Holder because of the earlier cancellation message from the 
routing destination. Instead, Arca Securities would post those 
positions into its error account and resolve the positions in the 
manner described below.
    Example C. Error positions may result if Arca Securities 
receives an execution report from a routing destination but does not 
receive clearing instructions for the execution from the routing 
destination. For instance, assume that an ETP Holder sends the 
Exchange an order to buy 100 shares of ABC stock, which causes Arca 
Securities to send an order to a routing destination that is 
subsequently executed, cleared and closed out by that routing 
destination, and the execution is ultimately communicated back to 
that ETP Holder. On the next trading day (T+1), if the routing 
destination does not provide clearing instructions for that 
execution, Arca Securities would still be responsible for settling 
that ETP Holder's purchase, but would be left with a short position 
in its error account.\9\ Arca Securities would resolve the position 
in the manner described below.
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    \9\ To the extent that Arca Securities incurred a loss in 
covering its short position, it would submit a reimbursement claim 
to that routing destination.
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    Example D. Error positions may result from a technical or 
systems issue that causes orders to be executed in the name of Arca 
Securities that are not related to Arca Securities' function as the 
Exchange's routing broker and are not related to any corresponding 
orders of ETP Holders. As a result, Arca Securities would not be 
able to assign any positions resulting from such an issue to ETP 
Holders. Instead, Arca Securities would post those positions into 
its error account and resolve the positions in the manner described 
below.
    Example E. Error positions may result from a technical or 
systems issue through which the Exchange does not receive sufficient 
notice that an ETP Holder that has executed trades on the Exchange 
has lost the ability to clear trades through DTCC. In such a 
situation, the Exchange would not have valid clearing information, 
which would prevent the trade from being processed pursuant to Rule 
7.41(a). Accordingly, Arca Securities would assume that ETP Holder's 
side of the trades so that the counterparties can settle the trades. 
Arca Securities would post those positions into its error account 
and resolve the positions in the manner described below.

    In the circumstances described above, Arca Securities may not learn 
about an error position until T+1, either: (1) During the clearing 
process when a routing destination has submitted to DTCC a transaction 
for clearance and settlement for which Arca Securities never received 
an execution confirmation; or (2) when a routing destination does not 
recognize a transaction submitted by Arca Securities to DTCC for 
clearance and settlement. Moreover, the affected ETP Holders' trade may 
not be nullified absent express authority under Exchange rules.\10\
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    \10\ See, e.g., NYSE Arca Equities Rule 7.10 (regarding clearly 
erroneous executions).
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Proposed Amendments to NYSE Arca Equities Rule 7.45
    The Exchange proposes to amend NYSE Arca Equities Rule 7.45 to add 
new paragraph (d) to address the cancellation of orders due to 
technical or systems issues and the use of an error account by Arca 
Securities.
    Specifically, under paragraph (d)(1) of the proposed rule, the 
Exchange or Arca Securities would be expressly authorized to cancel 
orders as may be necessary to maintain fair and orderly markets if a 
technical or systems issue occurred at the Exchange, Arca Securities, 
or a routing destination.\11\ The Exchange or Arca Securities would be 
required to provide notice of the cancellation to affected ETP Holders 
as soon as practicable.
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    \11\ Such a situation may not cause the Exchange to declare 
self-help against the routing destination pursuant to Rule 611 of 
Regulation NMS. If the Exchange or Arca Securities determines to 
cancel orders routed to a routing destination under proposed Rule 
7.45(d), but does not declare self-help against that routing 
destination, the Exchange would continue to be subject to the trade-
through requirements in Rule 611 with respect to that routing 
destination.
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    Paragraph (d)(2) of the proposed rule would permit Arca Securities 
to maintain an error account for the purpose of addressing positions 
that result from a technical or systems issue at Arca Securities, the 
Exchange, a routing destination, or a non-affiliate third-party Routing 
Broker that affects one or more orders (``error positions''). By 
definition, an error position would not include any position that 
results from an order submitted by an ETP Holder to the Exchange that 
is executed on the Exchange and processed pursuant to NYSE Arca Rule 
7.41(a).\12\ Arca Securities also would not be permitted to accept any 
positions in its error account from an account of an ETP Holder and 
could not permit any ETP Holder to transfer any positions from the ETP 
Holder's account to Arca Securities' error account under the proposed 
rule.\13\ However, if a technical or systems issue results in the 
Exchange not having valid clearing instructions for an ETP Holder to a 
trade, Arca Securities may assume that ETP Holder's side of the trade 
so that the trade can be processed pursuant to NYSE Arca Rule 
7.41(a).\14\
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    \12\ As provided in NYSE Arca Equities Rule 7.41(a), ``the 
details of each transaction executed within the NYSE Arca 
Marketplace [the Exchange] shall be automatically processed for 
clearance and settlement on a locked-in basis. ETP Holders need not 
separately report their transactions to the Corporation for trade 
comparison purposes.''
    \13\ The purpose of this provision is to clarify that Arca 
Securities may address error positions under the proposed rule that 
are caused by a technical or systems issue, but that Arca Securities 
may not accept from an ETP Holder positions that are delivered to 
the ETP Holder through the clearance and settlement process, even if 
those positions may have been related to a technical or systems 
issue at Arca Securities, the Exchange, a routing destination of 
Arca Securities, or a non-affiliate third-party Routing Broker. This 
provision would not apply, however, to situations like the one 
described above in which Arca Securities incurred a short position 
to settle an ETP Holder purchase, as the ETP Holder did not yet have 
a position in its account as a result of the purchase at the time of 
Arca Securities' action (i.e., Arca Securities' action was necessary 
for the purchase to settle into the ETP Holder's account). Moreover, 
to the extent an ETP Holder receives positions pursuant to Rule 
7.41(a) in connection with a technical or systems issue, that ETP 
Holder may seek to rely on NYSE Arca Equities Rule 13.2 if it 
experiences a loss. That rule provides ETP Holders with the ability 
to file claims against the Exchange ``for the failure of its systems 
or facilities.''
    \14\ See Example E above.
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    Under paragraph (d)(3), in connection with a particular technical 
or systems issue, Arca Securities or the Exchange would be permitted to 
either (i) assign all resulting error positions to ETP Holders, or (ii) 
have all resulting error positions liquidated, as described below. Any 
determination to assign or liquidate error positions, as well as any 
resulting assignments, would be required to be made in a 
nondiscriminatory fashion.
    Arca Securities or the Exchange would be required to assign all 
error positions resulting from a particular technical or systems issue 
to the applicable ETP Holders affected by that technical or systems 
issue if Arca Securities or the Exchange:

[[Page 19404]]

     Determined that it has accurate and sufficient information 
(including valid clearing information) to assign the positions to all 
of the applicable ETP Holders affected by that technical or systems 
issue;
     Determined that it has sufficient time pursuant to normal 
clearance and settlement deadlines to evaluate the information 
necessary to assign the positions to all of the applicable ETP Holders 
affected by that technical or systems issue; and
     Had not determined to cancel all orders affected by that 
technical or systems issue.
    For example, a technical or systems issue of limited scope or 
duration may occur at a routing destination, and the resulting trades 
may be submitted for clearance and settlement by such routing 
destination to DTCC. If there were a small number of trades, there may 
be sufficient time to match positions with ETP Holder orders and avoid 
using the error account.
    There may be scenarios, however, where Arca Securities determines 
that it is unable to assign all error positions resulting from a 
particular technical or systems issue to all of the affected ETP 
Holders, or determines to cancel all affected routed orders. For 
example, in some cases, the volume of questionable executions and 
positions resulting from a technical or systems issue might be such 
that the research necessary to determine which ETP Holders to assign 
those executions to could be expected to extend past the normal 
settlement cycle for such executions. Furthermore, if a routing 
destination experiences a technical or systems issue after Arca 
Securities has transmitted IOC orders to it that prevents Arca 
Securities from receiving responses to those orders, Arca Securities or 
the Exchange may determine to cancel all routed orders affected by that 
issue. In such a situation, Arca Securities or the Exchange would not 
pass on to the ETP Holders any executions on the routed orders received 
from the routing destination.
    The proposed rule also would require Arca Securities to liquidate 
error positions as soon as practicable.\15\ In liquidating error 
positions, Arca Securities would be required to provide complete time 
and price discretion for the trading to liquidate the error positions 
to a third-party broker-dealer and could not attempt to exercise any 
influence or control over the timing or methods of trading to liquidate 
the error positions. Arca Securities also would be required to 
establish and enforce policies and procedures reasonably designed to 
restrict the flow of confidential and proprietary information between 
the third-party broker-dealer and Arca Securities/the Exchange 
associated with the liquidation of the error positions.
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    \15\ If Arca Securities determines in connection with a 
particular technical or systems issue that some error positions can 
be assigned to some affected ETP Holders but other error positions 
cannot be assigned, Arca Securities would be required under the 
proposed rule to liquidate all such error positions (including those 
positions that could be assigned to the affected ETP Holders).
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    Under proposed paragraph (d)(4), Arca Securities and the Exchange 
would be required to make and keep records to document all 
determinations to treat positions as error positions and all 
determinations for the assignment of error positions to ETP Holders or 
the liquidation of error positions, as well as records associated with 
the liquidation of error positions through the third-party broker-
dealer.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) \16\ of 
the Securities Exchange Act of 1934 (the ``Act''), in general, and 
furthers the objectives of Section 6(b)(5),\17\ 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 facilitating 
transactions in securities, 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 it is not 
designed to permit unfair discrimination among customers, brokers, or 
dealers. The Exchange believes that this proposal is in keeping with 
those principles since Arca Securities' or the Exchange's ability to 
cancel orders during a technical and systems issue and to maintain an 
error account facilitates the smooth and efficient operations of the 
market. Specifically, the Exchange believes that allowing Arca 
Securities or the Exchange to cancel orders during a technical or 
systems issue would allow the Exchange to maintain fair and orderly 
markets. Moreover, the Exchange believes that allowing Arca Securities 
to assume error positions in an error account and to liquidate those 
positions, subject to the conditions set forth in the proposed 
amendments to NYSE Arca Equities Rule 7.45, would be the least 
disruptive means to correct these errors, except in cases where Arca 
Securities can assign all such error positions to all affected ETP 
Holders of the Exchange. Overall, the proposed amendments are designed 
to ensure full trade certainty for market participants and to avoid 
disrupting the clearance and settlement process. The proposed 
amendments are also designed to provide a consistent methodology for 
handling error positions in a manner that does not discriminate among 
ETP Holders. The proposed amendments are also consistent with Section 6 
of the Act insofar as they would require Arca Securities to establish 
controls to restrict the flow of any confidential information between 
the third-party broker and Arca Securities/the Exchange associated with 
the liquidation of error positions.
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    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(5).
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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.

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

    No written comments were solicited or received with respect to the 
proposed rule change.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

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

[[Page 19405]]

     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NYSEArca-2012-22 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSEArca-2012-22. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NYSEArca-2012-22, and should 
be submitted on or before April 20, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-7629 Filed 3-29-12; 8:45 am]
BILLING CODE 8011-01-P