Document ID: SEC-2014-0563-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE MKT LLC
Posted Date: 2014-04-07T04:00Z

[Federal Register Volume 79, Number 66 (Monday, April 7, 2014)]
[Notices]
[Pages 19162-19165]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-07637]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71840; File No. SR-NYSEMKT-2014-21]

Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing of 
Proposed Rule Change To Make Permanent Its Pilot Program Regarding 
Minimum Value Sizes for Opening Transactions in Flexible Exchange 
Options and Establish New Minimum Value Sizes Applicable to Other FLEX 
Transactions and FLEX Quotes

April 1, 2014.
    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 18, 2014, NYSE MKT LLC. (the ``Exchange'' or 
``NYSE MKT'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II, 
and III 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 Substance 
of the Proposed Rule Change

    The Exchange proposes to make permanent its pilot program (``Pilot 
Program'') regarding minimum value [sic] scheduled to expire on March 
31, 2014, and to establish new minimum value sizes applicable to other 
FLEX transactions and FLEX [sic]. The text of the proposed rule change 
is available on the Exchange's Web site at www.nyse.com, at the 
principal office of the Exchange, 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 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to make permanent its Pilot Program regarding 
minimum value sizes for FLEX Options,\4\ currently scheduled to expire 
on March 31, 2014.\5\ The Exchange believes that the Pilot Program has 
been successful and well-received by its membership and the investing 
public for the period that it has been in operation as a Pilot 
Program.\6\
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    \4\ FLEX Options provide investors with the ability to customize 
basic option features including size, expiration date, exercise 
style, and certain exercise prices. FLEX Options can be FLEX Index 
Options or FLEX Equity Options. The trading of FLEX Options is 
governed by NYSE MKT Rules 900G-909G.
    \5\ See Securities Exchange Act Release No. 69255 (March 28, 
2013), 78 FR 20158 (April 3, 2013) (SR-NYSEMKT-2013-28).
    \6\ The Pilot Program was initiated on May 12, 2010. See 
Securities Exchange Act Release No. 62084 (May 12, 2010), 75 FR 
28091 (May 19, 2010) (SR-NYSEAmex-2010-40).
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Minimum Value Sizes for FLEX Options
    Prior to the initiation of the Pilot Program, the minimum value 
size requirement for every FLEX Request for Quotes and every responsive 
FLEX Quote [sic] under Rule 903G(a)(4)(ii) was as follows:
     For an opening transaction (other than FLEX Quotes 
responsive to a FLEX Request for Quotes) in any FLEX series in which 
there is no open interest at the time the Request for Quotes is 
submitted, the minimum value size was, (i) for FLEX Equity Options, the 
lesser of 250 contracts or the number of contracts overlying $1 million 
in the underlying securities; and (ii) for FLEX Index Options, $10 
million Underlying Equivalent Value in the case of Broad Stock Index 
Group FLEX Index Options and $5 million Underlying Equivalent Value in 
the case of Stock Index Industry Group FLEX Index Options. Under a 
prior pilot program (which was superseded by the minimum value size 
Pilot Program), the ``250 contracts'' component above had been reduced 
to ``150 contracts.'' \7\
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    \7\ See Securities Exchange Act Release No. 58037 (June 26, 
2008), 73 FR 38008 (July 2, 2008) (SR-Amex-2008-50) (approval of 
rule change that, among other things, established a pilot program 
that reduced the minimum number of contracts required for a FLEX 
Equity Option opening transaction in a new series).
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    Pursuant to the Pilot Program, notwithstanding the above-described 
rule text, the minimum size for an opening transaction in a new FLEX 
series is one contract. As mentioned above, the minimum value size 
Pilot Program is currently set to expire on March 31, 2014.
    In addition to the minimum value size applicable to opening FLEX 
transactions in new series, as described above, Rule 903(G)(a)(iii)-
(iv) prescribes minimum value sizes for other FLEX transactions and 
FLEX Quotes as follows:
     For a transaction in any currently-opened FLEX series, the 
minimum value size is (i) for FLEX Equity Options, the lesser of 100 
contracts or the number of contracts overlying $1 million in the 
underlying securities in the case of opening transactions, and 25 
contracts in the case of closing transactions; and (ii) for FLEX Index 
Options, $1 million Underlying Equivalent Value in the case of both 
opening and closing transactions; or (iii) for either case, the 
remaining underlying size or Underlying Equivalent Value on a closing 
transaction, whichever is less.
     The minimum value size for FLEX Quotes responsive to a 
Request for Quotes is 25 contracts in the case of FLEX Equity Options 
and $1 million Underlying Equivalent Value in the case of FLEX Index 
Options or for either case the remaining underlying size or Underlying 
Equivalent Value on a closing transaction, whichever is less.
Proposal
    The Exchange is proposing to make the Pilot Program permanent. To 
accomplish this change, the Exchange is proposing to eliminate the rule 
text describing the Pilot Program, which is contained in Commentary .01 
to Rule 903G, and to eliminate the rule text describing the pre-Pilot 
Program minimum value size requirements, which is contained in Rule 
903G(a)(4).

[[Page 19163]]

    In support of approving the Pilot Program on a permanent basis, and 
as required by the Pilot Program's approval order, the Exchange is 
submitting to the Commission a Pilot Program report (``Report''), which 
is a public report detailing the Exchange's experience with the 
program.\8\ Specifically, the Exchange is providing the Commission an 
annual report, containing data and analysis of underlying equivalent 
values, open interest and trading volume, and analysis of the types of 
investors that initiated opening FLEX Equity and Index Options 
transactions (i.e., institutional, high net worth, or retail) in new 
FLEX series.
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    \8\ A copy of the Report has been attached as Exhibit 3 to this 
filing.
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    The Exchange believes that there is sufficient investor interest 
and demand in the Pilot Program to warrant its permanent approval. The 
Exchange believes that, for the period that the Pilot Program has been 
in operation, it has provided investors with additional means of 
managing their risk exposures and carrying out their investment 
objectives. Furthermore, as discussed in more detail below, the 
Exchange has not experienced any adverse market effects with respect to 
the Pilot Program.
    The Exchange believes that eliminating the minimum value size 
requirements for opening transactions in new FLEX series on a permanent 
basis is important and necessary to the Exchange's efforts to create a 
product and market that provide its membership and investors interested 
in FLEX-type options with an improved but comparable alternative to the 
over-the-counter (``OTC'') market in customized options, which can take 
on contract characteristics similar to FLEX Options but are not subject 
to the same restrictions. By making the Pilot Program permanent, market 
participants would continue to have greater flexibility in determining 
whether to execute their customized options in an exchange environment 
or in the OTC market. The Exchange believes that market participants 
would benefit from being able to trade these customized options in an 
exchange environment in several ways, including, but not limited to, 
the following: (i) Enhanced efficiency in initiating and closing out 
positions; (ii) increased market transparency; and (iii) heightened 
contra-party creditworthiness due to the role of The Options Clearing 
Corporation (``OCC'') as issuer and guarantor of FLEX Options. The 
Exchange also believes that the Pilot Program is wholly consistent with 
comments by then Secretary of the Treasury Timothy F. Geithner, to the 
U.S. Senate. In particular, Secretary Geithner stated that:

    Market efficiency and price transparency should be improved in 
derivatives markets by requiring the clearing of standardized 
contracts through regulated [central counterparties] and by moving 
the standardized part of these markets onto regulated exchanges and 
regulated transparent electronic trade execution systems for OTC 
derivatives and by requiring development of a system for timely 
reporting of trades and prompt dissemination of prices and other 
trade information. Furthermore, regulated financial institutions 
should be encouraged to make greater use of regulated exchange-
traded derivatives. Competition between appropriately regulated OTC 
derivatives markets and regulated exchanges will make both sets of 
markets more efficient and thereby better serve end-users of 
derivatives.\9\
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    \9\ See letter from Secretary Geithner to the Honorable Harry 
Reid, United States Senate (May 13, 2009), located at http://www.financialstability.gov/docs/OTCletter.pdf.

    The Exchange believes that the elimination of the minimum value 
size requirements for opening transactions in new FLEX series on a 
permanent basis would provide FLEX-participating ATP Holders with 
greater flexibility in structuring the terms of FLEX Options that best 
comports with their and their customers' particular needs. In this 
regard, the Exchange notes that the minimum value size requirements for 
opening transactions in new FLEX series were originally put in place to 
limit participation in FLEX Options to sophisticated, high net worth 
investors rather than retail investors.\10\ However, the Exchange 
believes that the restriction is no longer necessary and is overly 
restrictive. The Exchange has also not experienced any adverse market 
effects with respect to the Pilot Program eliminating the minimum value 
size requirements for opening transactions in new FLEX series. Again, 
based on the Exchange's experience to date and throughout the Pilot 
Program period, the minimum value size requirements are too large to 
accommodate the needs of ATP Holders and their customers--who may be 
institutional, high net worth or retail--that currently participate in 
the OTC market. In this regard, the Exchange notes that, prior to 
establishing the Pilot Program, it received numerous requests from 
broker-dealers representing institutional, high net worth and retail 
investors indicating that the minimum value size requirements prevented 
them from bringing transactions that are already taking place in the 
OTC market to an exchange environment. The Exchange believes that 
eliminating the minimum value size requirements for opening 
transactions in new FLEX series on a permanent basis would further 
broaden the base of investors that use FLEX Options to manage their 
trading and investment risk, including investors that currently trade 
in the OTC market for customized options, where similar size 
restrictions do not apply. The Exchange also believes that this may 
open up FLEX Options to more retail investors. The Exchange does not 
believe that this raises any unique regulatory concerns because 
existing safeguards--such as certain position limit, exercise limit, 
and reporting requirements--continue to apply.\11\ In addition, the 
Exchange notes that FLEX Options are subject to the options disclosure 
document (``ODD'') requirements of Rule 9b-1\12\ under the Securities 
Exchange Act of 1934 (the ``Act'').\13\ No broker or dealer can accept 
an order from a customer to purchase or sell an option contract 
relating to an options class that is the subject of a definitive ODD 
(including FLEX Options), or approve the customer's account for the 
trading of such an option, unless the broker or dealer furnishes or has 
furnished to the customer a copy of the definitive ODD. The ODD 
contains a description, special features, and special risks of FLEX 
Options. Lastly, similar to any other options, FLEX Options are subject 
to ATP Holder organization supervision and suitability requirements, 
such as in Rules 922 (Supervision of Accounts) and 923 (Suitability).
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    \10\ See Securities Exchange Act Release No. 37336 (June 19, 
1996), 61 FR 33558 (June 27, 1996) (SR-Amex-95-57).
    \11\ The Exchange also notes that certain position limit, 
aggregation and exercise limit requirements continue to apply to 
FLEX Options in accordance with Rules 906G (Position Limits) and 
907G (Exercise Limits). The Commission notes that certain FLEX 
Options do not have position or exercise limits.
    \12\ 17 CFR 240.9b-1.
    \13\ 15 U.S.C. 78a et seq.
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    In proposing the Pilot Program itself and in now proposing to make 
it permanent, the Exchange is cognizant of the need for market 
participants to have substantial options transaction capacity and 
flexibility to hedge their substantial investment portfolios, on the 
one hand, and the potential for adverse effects that the minimum value 
size restrictions were originally designed to address, on the other. 
However, the Exchange has not experienced any adverse market effects 
with respect to the Pilot Program. The Exchange is also cognizant of 
the OTC market, in which similar restrictions on minimum value size do 
not apply. In light of these

[[Page 19164]]

considerations and Secretary Geithner's comments on moving the 
standardized parts of OTC contracts onto regulated exchanges, the 
Exchange believes that making the Pilot Program permanent is 
appropriate and reasonable and will provide market participants with 
additional flexibility in determining whether to execute their 
customized options in an exchange environment or in the OTC market. The 
Exchange believes that market participants benefit from being able to 
trade these customized options in an exchange environment in several 
ways, including, but not limited to, enhanced efficiency in initiating 
and closing out positions, increased market transparency, and 
heightened contra-party creditworthiness due to the role of OCC as 
issuer and guarantor of FLEX Options.
    Pursuant to this filing, the Exchange proposes to adopt the 
existing Pilot Program,\14\ on a permanent basis. Specifically, the 
Exchange proposes to eliminate all references to minimum size 
applicable to opening transactions in new FLEX series as presently 
described in Rule 903G(a)(4)(ii). The proposal to eliminate the minimum 
value size applicable to opening transactions in new FLEX series is 
similar to a rule change by the CBOE when adopting their Pilot Program 
on a permanent basis.\15\
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    \14\ See supra note 5.
    \15\ See Securities Exchange Act Release Nos. 66934 (May 7, 
2012), 77 FR 27822 (May 11, 2012) (SR-CBOE-2012-040); 67624 (August 
8, 2012), 77 FR 48580 (August 14, 2012) (SR-CBOE-2012-040).
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    Present Rules 903G(a)(4)(iii)(A)-(B) govern the minimum value size 
for FLEX Equity and FLEX Index Options transactions in currently opened 
FLEX series. Subsection (A) states that the minimum value size for FLEX 
Equity Options shall be the lesser of 100 contracts or the number of 
contracts overlying $1 million in the underlying securities in the case 
of opening transactions, and 25 contracts in the case of closing 
transactions. Subsection (B) states for FLEX Index Options, the minimum 
value size shall be $1 million Underlying Equivalent Value in the case 
of both opening and closing transactions. Additionally, Rule 
903G(a)(4)(iv) states that the minimum value size for FLEX Quotes 
responsive to a Request for Quotes (``RFQ'') shall be 25 contracts in 
the case of FLEX Equity Options and $1 million Underlying Equivalent 
Value in the case of FLEX Index Options, or for either case the 
remaining underlying size or Underlying Equivalent Value on a closing 
transaction, whichever is less. The Exchange now proposes to adopt a 
minimum value size of one contract when opening and closing any Equity 
or Index FLEX Options transaction in previously opened FLEX series and 
for responses to Requests for Quotes. This change, coupled with the 
proposed change to the minimum value size for opening transaction in 
new FLEX series (described above) will effectively establish a one 
contract minimum value size for all FLEX transactions and FLEX Quotes. 
A one contract minimum value size for all FLEX Options transactions and 
FLEX Quotes is based on similar rules governing minimum value size for 
FLEX Options approved for the CBOE.\16\
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    \16\ See supra note 15.
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    Adopting the same minimum value size for all FLEX transactions and 
FLEX Quotes would afford market participants, both those trading in new 
a FLEX series, and those trading in an existing FLEX series, equal 
opportunity to tailor FLEX transactions to meet their own investment 
objectives without being encumbered by a minimum value size. The 
Exchange does not believe that the difference between effecting a FLEX 
transaction in an existing series and effecting a FLEX transaction in a 
new series is material to the extent that there should be different 
minimum value sizes for the two types of transactions. In addition, the 
Exchange believes it would be consistent to apply the same minimum 
value size to closing transactions so that investors may elect to close 
just a portion of their FLEX position, without being subject to a 
minimum value size that may be greater than the equivalent value size 
necessary to meet their investment objectives. Lastly, the Exchange 
believes that it would be consistent to apply the same minimum value 
size to FLEX Quotes so that market participants may respond to an RFQ 
with the precise number of contracts or underlying equivalent value 
needed to trade with a submitting OTP Holder who has requested the RFQ.
    As previously stated the Exchange is submitting to the Commission a 
Report detailing the Exchange's experience with the Pilot Program. The 
Report is attached as Exhibit 3 to this filing. The Exchange notes that 
the Report includes data specific to the trade activity under Rule 
903G(a)(4)(ii) and does not include data pursuant to subsections (iii)-
(iv) dealing with opening transactions of less than 100 contracts in 
previously opened FLEX series, and closing transactions and responses 
to RFQs of less than 25 contracts, which the Exchange is proposing to 
amend at this time. Based on the Exchange's internal review, the 
Exchange believes that these types of FLEX transactions, had they been 
part of the Pilot Program, would be de minimis and does not believe 
that the absence of trade data specific to opening transactions of less 
than 100 contracts in previously opened FLEX series, or closing 
transactions and responses to RFQs of less than 25 contracts would be 
material to the extent that the findings in the Report would fail to 
provide evidence supporting the elimination of specific contract and 
value sizes for all FLEX transactions.
    For the foregoing reasons, the Exchange believes that the proposed 
changes to the minimum value size for FLEX transactions and FLEX Quotes 
are reasonable and appropriate, promote just and equitable principles 
of trade, and facilitate transactions in securities while continuing to 
foster the public interest and investor protection.
    The Exchange will continue to monitor the usage of FLEX Options and 
review whether changes need to be made to its Rules or the ODD to 
address any changes in retail FLEX Option participation or any other 
issues that may occur as a result of the elimination of the minimum 
value sizes on FLEX transactions.
    In conjunction with these changes, the Exchange is proposing 
certain non-substantive changes to reorganize the rule text. In 
particular, text from Rule 903G(a)(4)(i) pertaining to the maximum 15-
year term for a FLEX Option would be relocated and renumbered as Rule 
903G(a)(2)(vi), [sic] As proposed, Rule 903G(a)(2)(vi) would state that 
the maximum term for both equity and index FLEX Options shall be 15 
years [sic] In addition, the Exchange proposes to relocate relevant 
text pertaining to the minimum value size for FLEX Options from 
Commentary .02 and renumber it as Rule 903G(a)(2)(vii). As proposed, 
Rule 903G(a)(2)(vii) would state that the minimum value size for all 
FLEX Equity and FLEX Index Options transactions shall be 1 contract. 
The Exchange proposes renumbering present Commentary .02 as Commentary 
.01. These changes are proposed simply to reorganize the rule text in 
light of the other changes being proposed. As noted above, the changes 
are not substantive.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the 
Act, in general, and furthers the objectives of Section 6(b)(5), 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,

[[Page 19165]]

and to remove impediments to and perfect the mechanism of a free and 
open market and a national market system.
    Specifically, the Exchange believes that the permanent approval of 
the Pilot Program, which eliminates minimum value size requirements for 
opening transactions in new FLEX series, would provide greater 
opportunities for investors to manage risk through the use of FLEX 
Options. Further, the Exchange notes that it has not experienced any 
adverse effects from the operation of the Pilot Program. The Exchange 
also believes that making the Pilot Program permanent does not raise 
any unique regulatory concerns.
    The Exchange also believes that eliminating the minimum value size 
requirements for all other FLEX transactions and FLEX Quotes, thus 
affording market participants on NYSE Amex Options with an equal 
opportunity to tailor FLEX transactions to meet their own investment 
objectives without being encumbered by a minimum contract size, will 
help to remove impediments to and perfect the mechanism of a free and 
open market and a national market system. In addition, offering those 
same market participants similar investment tools available to their 
counterparts on the CBOE will foster cooperation and coordination with 
persons engaged in facilitating transactions in securities and will 
help to remove impediments to a free and open market and a national 
market system. The Exchange believes that adopting rules similar to 
those approved for and utilized by the CBOE does not raise any unique 
regulatory concerns.
    Lastly, the Exchange also believes that the proposed rule change, 
which provides all market participants, including public investors, 
with additional opportunities to trade customized options in an 
exchange environment and subject to exchange-based rules, is 
appropriate in the public interest and for the protection of investors.

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. Specifically, the proposal 
is structured to offer the same enhancement to all market participants, 
regardless of account type, and will not impose a competitive burden on 
any participant. The Exchange believes that adopting similar FLEX rules 
to those [sic] the CBOE will allow NYSE Amex Options to more 
efficiently compete for FLEX Options orders. In addition, the Exchange 
believes that adopting the Pilot Program on a permanent basis will 
enable the Exchange to compete with the OTC market, in which similar 
restrictions on minimum value size do not apply.

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 the 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
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NYSEMKT-2014-21 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-NYSEMKT-2014-21. 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 10:00 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; 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-NYSEMKT-2014-21 and should 
be submitted on or before April 28, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-07637 Filed 4-4-14; 8:45 am]
BILLING CODE 8011-01-P