Document ID: SEC-2021-1805-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe Exchange, Inc.
Posted Date: 2021-12-27T05:00Z

[Federal Register Volume 86, Number 245 (Monday, December 27, 2021)]
[Notices]
[Pages 73353-73360]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-27924]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-93831; File No. SR-CBOE-2021-075]

Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change To Increase Position Limits for 
Options on the SPDR Gold Trust and iShares Silver Trust

December 20, 2021.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934,\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that on 
December 7, 2021, Cboe Exchange, Inc. filed with the Securities and 
Exchange Commission (``Commission'') the 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

    Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes 
to increase position limits for options on the SPDR Gold Trust 
(``GLD'') and iShares Silver Trust (``SLV''). The text of the proposed 
rule change is provided in Exhibit 5.
    The text of the proposed rule change is also available on the 
Exchange's website (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the 
Secretary, 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

[[Page 73354]]

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
    Position limits are designed to address potential manipulative 
schemes and adverse market impacts surrounding the use of options, such 
as disrupting the market in the security underlying the options. While 
position limits should address and discourage the potential for 
manipulative schemes and adverse market impact, if such limits are set 
too low, participation in the options market may be discouraged. The 
Exchange believes that position limits must therefore be balanced 
between mitigating concerns of any potential manipulation and the cost 
of inhibiting potential hedging activity that could be used for 
legitimate economic purposes.
    The Exchange has observed an ongoing increase in demand, for both 
trading and hedging purposes, in options on GLD and SLV (collectively, 
the ``Underlying ETFs''). Though the demand for these options appears 
to have increased, position limits for options on the Underlying ETFs 
have remained the same. The Exchange believes these unchanged position 
limits may have impeded, and may continue to impede, trading activity 
and strategies of investors, such as use of effective hedging vehicles 
or income generating strategies (e.g., buy-write or put-write), and the 
ability of Market-Makers to make liquid markets with tighter spreads in 
these options resulting in the transfer of volume to over-the-counter 
(``OTC'') markets. OTC transactions occur through bilateral agreements, 
the terms of which are not publicly disclosed to the marketplace. As 
such, OTC transactions do not contribute to the price discovery process 
on a public exchange or other lit markets. Therefore, the Exchange 
believes that the proposed increases in position limits for options on 
the Underlying ETFs may enable liquidity providers to provide 
additional liquidity to the Exchange and other market participants to 
transfer their liquidity demands from OTC markets to the Exchange. As 
described in further detail below, the Exchange believes that the 
continuously increasing market capitalization of the Underlying ETFs, 
ETF components, as well as the highly liquid markets for each, reduces 
the concerns for potential market manipulation and/or disruption in the 
underlying markets upon increasing position limits, while the rising 
demand for trading options on the Underlying ETFs for legitimate 
economic purposes compels an increase in position limits.
Proposed Position Limits for Options on the Underlying ETFs
    Position limits for options on ETFs are determined pursuant to Rule 
8.30 and vary according to the number of outstanding shares and the 
trading volumes of the underlying equity security (which includes ETFs) 
over the past six months. Pursuant to Rule 8.30, the largest in 
capitalization and the most frequently traded stocks and ETFs have an 
option position limit of 250,000 contracts (with adjustments for 
splits, re-capitalizations, etc.) on the same side of the market; and 
smaller capitalization stocks and ETFs have position limits of 200,000, 
75,000, 50,000 or 25,000 contracts (with adjustments for splits, re-
capitalizations, etc.) on the same side of the market. Options on GLD 
and SLV are currently subject to the standard position limit of 250,000 
contracts as set forth in Rule 8.30. Rule 8.30.07 sets forth separate, 
higher position limits for specific equity options (including options 
on specific ETFs).\3\ The Exchange proposes to amend Rule 8.30.07 to 
increase the position limits and, as a result, exercise limits, for 
options on GLD and options on SLV.\4\ Specifically, the proposed rule 
change increases the current position limit of 250,000 contract for 
options on GLD and SLV to 500,000 contracts.
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    \3\ Adjusted option series, in which one option contract in the 
series represents the delivery of other than 100 shares of the 
underlying security as a result of a corporate action by the issuer 
of the security underlying such option series, do not impact the 
notional value of the underlying security represented by those 
options. When an underlying security undergoes a corporate action 
resulting in adjusted series, the Exchange lists new standard option 
series across all appropriate expiration months the day after the 
existing series are adjusted. The adjusted series are generally 
actively traded for a short period of time following adjustment, but 
orders to open options positions in the underlying security are 
almost exclusively placed in the new standard option series 
contracts.
    \4\ By virtue of [sic] 8.42.02, which is not being amended by 
this filing, the exercise limits for GLD and SLV options would be 
similarly increased.
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    The Exchange notes that the proposed position limit for options on 
GLD and SLV are consistent with current position limits for options on 
various other ETFs including the iShares MSCI Brazil Capped ETF 
(``EWZ''), iShares 20+ Year Treasury Bond Fund ETF (``TLT''), iShares 
MSCI Japan ETF (``EWJ''), iShares iBoxx High Yield Corporate Bond Fund 
(``HYG'') and Financial Select Sector SPDR Fund (``XLF''). The Exchange 
represents that both of the Underlying ETFs meet the Exchange's initial 
listing criteria pursuant to Rule 4.3.06(b) and (c), as well as the 
continued listing criteria in Rule 4.4 (for ETFs).
Composition and Growth Analysis for Underlying ETFs
    As stated above, position (and exercise) limits are intended to 
prevent the establishment of options positions that can be used to or 
potentially create incentives to manipulate the underlying market so as 
to benefit options positions. The Securities and Exchange Commission 
(the ``Commission'') has recognized that these limits are designed to 
minimize the potential for mini-manipulations and for corners or 
squeezes of the underlying market, as well as serve to reduce the 
possibility for disruption of the options market itself, especially in 
illiquid classes.\5\ The Underlying ETFs, as well as the ETF 
components, are highly liquid and are based on a broad set of highly 
liquid securities and other reference assets, as demonstrated through 
the trading statistics presented in this proposal. To support the 
proposed position limit increases, the Exchange considered the 
liquidity of the Underlying ETFs, the value of the Underlying ETFs, 
their components and the relevant marketplace, the share and option 
volume for the Underlying ETFs, and, where applicable, the availability 
or comparison of economically equivalent products to options on the 
Underlying ETFs.
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    \5\ See Securities Exchange Act Release No. 67672 (August 15, 
2012), 77 FR 50750 (August 22, 2012) (SR-NYSEAmex-2012-29).
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    The Exchange has collected the following trading statistics 
regarding shares of and options on the Underlying ETFs and the values 
of the Underlying ETFs and their components:

[[Page 73355]]

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                                ADV \6\ (ETF                       Shares        Fund Market
           Product                 shares)       ADV (option     outstanding      cap (USD)     Share value \9\
                                 (millions)      contracts)    (millions) \7\  (millions) \8\        (USD)
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GLD..........................            12.3         257,700          354.30        70,195.7       161.71 (NAV)
SLV..........................            33.1         376,700           619.3        14,228.4        22.57 (NAV)
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    The Exchange has collected the same trading statistics, where 
applicable, as above regarding a sample of other ETFs, as well as the 
current position limits for options on such ETFs pursuant to Rule 
8.30.07, to draw comparisons in support of proposed position limit 
increases for options on the Underlying ETFs (see further discussion 
below):
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    \6\ Average daily volume (ADV) data for ETF shares and option 
contracts, as well as for ETF shares and options on the comparative 
ETFs presented below, are for all of 2020. Additionally, reference 
to ADV in ETF shares and ETF options, and indexes herein this 
proposal are for all of calendar year 2020, unless otherwise 
indicated.
    \7\ Shares Outstanding and Net Asset Values (``NAV''), as well 
as for the comparative ETFs presented below, are as of April 5, 2021 
for all ETFs.
    \8\ Fund Market Capitalization data, as well as for the 
comparative ETFs presented below, are as of January 14, 2021.
    \9\ See supra note 7.

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                                                       ADV (ETF                         Shares        Fund market
                      Product                           shares)       ADV (option     outstanding      cap (USD)    Share value (USD)   Current position
                                                      (millions)      contracts)      (millions)      (millions)                             limits
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EWZ...............................................            29.2         139,400           173.8         6,506.8        33.71 (NAV)            500,000
TLT...............................................            11.5         111,800           103.7        17,121.3       136.85 (NAV)            500,000
EWJ...............................................             8.2          15,500           185.3        13,860.7        69.72 (NAV)            500,000
HYG...............................................            30.5         261,600           254.5        24,067.5        86.86 (NAV)            500,000
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    The Exchange believes that, overall, the liquidity in the shares of 
the Underlying ETFs and in their overlying options, the larger market 
capitalizations for each of the Underlying ETFs, and the overall market 
landscape relevant to each of the Underlying ETFs support the proposal 
to increase the position limits for each option class. Given the robust 
liquidity in and value of the Underlying ETFs and their components, the 
Exchange does not anticipate that the proposed increase in position 
limits would create significant price movements as the relevant markets 
are large enough to adequately absorb potential price movements that 
may be caused by larger trades.
    Specifically, the investment objective of GLD (or the ``Trust'') is 
to track the performance of the price of gold bullion.\10\ GLD offers 
investors an innovative, relatively cost efficient and secure way to 
access the gold market, without the necessity of taking physical 
delivery of gold, and to buy and sell that interest through the trading 
of a security on a regulated stock exchange. The Trust issues SPDR Gold 
Shares, which represent fractional, undivided beneficial ownership 
interests in the Trust, the sole assets of which are gold bullion. The 
spot price for gold is determined by market forces in the 24-hour 
global unregulated OTC market for gold including spot, forwards, and 
options and other derivatives, together with exchange-traded futures 
and options. The Net Asset Value (``NAV'') of the Trust is calculated 
based on the total ounces of gold owned by the Trust valued at the 
London Bullion Market Association (``LBMA'') Gold Price PM of that day 
(plus any cash held by the Trust less accrued expenses).\11\ The 
Exchange has observed that the ADV in GLD shares has increased from 
approximately 8.7 million shares in 2019 to 12.3 million shares by the 
end of 2020. Similarly, the ADV in options on GLD has increased from 
approximately 153,900 option contracts in 2019 to 257,700 option 
contracts by the end of 2020. The Exchange also notes that in the first 
quarter of 2021, GLD options experienced an ADV of approximately 
395,100 option contracts. Additionally, comparing the statistics shown 
in the tables above for GLD and the sample of other ETFs with a current 
position limit of 500,000 contracts, the Exchange notes that the ADV 
for GLD options (257,700 option contracts) are more, or just as, liquid 
as that of the ADV for options on EWZ (139,300 option contracts), TLT 
(111,800 option contracts), EWJ (15,500 option contracts) and HYG 
(261,600 option contracts), each ETF of which already has a position 
limit of 500,000 contracts. Additionally, the ADV for GLD shares (12.3 
million shares) is more liquid than that of the ADV for shares of TLT 
(11.5 million shares) and EWJ (8.2 million shares). Also, as indicated 
in the table above, GLD's market capitalization (approximately $70.2 
billion) is higher than all four of the sample ETFs, which currently 
have a position limit of 500,000 contracts. In addition to this, the 
Exchange notes that the NAV of GLD is higher than that of the NAV of 
the four sample ETFs, which is indicative that the total value of its 
underlying components is generally higher. The Exchange believes that 
GLD's share and option volume, its market capitalization, and the 
comparatively high value of its underlying components (as indicated by 
its NAV, and as discussed in further detail below) are large enough to 
absorb potential price movements caused by a large trade in GLD.
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    \10\ See SPDR Gold Shares, available at https://www.ssga.com/us/en/intermediary/etfs/funds/spdr-gold-shares-gld (January 11, 2021).
    \11\ See State Street Global Advisors, SPDR Gold Trust GLD, FAQ 
(July 2020), available at https://www.ssga.com/library-content/products/fund-docs/etfs/us/tax-documents/gld-faq.pdf.
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    Like that of GLD and spot gold, SLV seeks to reflect generally the 
performance of the price of silver and represents a cost-efficient 
alternative to investments in physical silver for investors not 
otherwise in a position to participate directly in the market for 
physical silver. The SLV's NAV is derived from its holdings in silver 
valued on the basis of the daily LBMA Silver Price.\12\ SLV, too, has 
experienced a significant increase in ADV in shares and options from 
2019 through 2020. It grew from approximately 13.6 million shares in 
2019 to 33.1 million shares by the end of 2020, and from approximately 
118,800 option contracts

[[Page 73356]]

in 2019 to 376,700 option contracts by the end of 2020. The Exchange 
also notes that SLV options experienced an ADV of approximately 1.1 
million option contracts in the first quarter of 2021.\13\ 
Additionally, SLV generally experiences a significantly greater ADV in 
shares (33.1 million share) and in options (376,700 option contracts) 
than that of the ADV in shares and options for EWZ (29.2 million shares 
and 139,300 option contracts), TLT (11.5 million shares and 111,800 
option contracts), EWJ (8.2 million shares and 15,500 option contracts) 
and HYG (30.5 million shares and 261,600 option contracts), and also 
has a comparable, or higher, market capitalization (approximately $14.2 
billion) than EWZ, TLT and EWJ. As per the table above, options on each 
of these ETFs already have a position limit of 500,000 contracts--the 
proposed position limit for SLV options. The Exchange believes that SLV 
share and option volume and its market capitalization are large enough 
to absorb potential price movements caused by a large trade in SLV.
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    \12\ See iShares Silver Trust, Fact Sheet as of 9/20/2020, 
available at https://www.ishares.com/us/literature/fact-sheet/slv-ishares-silver-trust-fund-fact-sheet-en-us.pdf.
    \13\ While volume in SLV options in the first quarter of 2021 
experienced significantly high volume as a result of unusual market 
conditions, the Exchange believes that the existing possibility of 
such significant increases supports the proposed position limit 
increase.
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    While the demand for options trading on GLD and SLV has evidently 
increased, and continues to increase, the position limits have remained 
the same, which the Exchange believes may be impacting the ability of 
Trading Permit Holders (``TPHs'') to effectively hedge against exposure 
to physical gold and silver. For example, a single TPH may manage 
groups of mutual funds (i.e., a fund complex), each of which may have 
different growth objectives. If one portfolio manager with a large 
group of funds has a relatively small exposure to spot gold or spot 
silver, they may hedge such exposure using GLD options or SLV options, 
respectively. Though relatively small, this hedge (up to 250,000 option 
contracts for GLD and for SLV) may utilize the TPH's entire capacity 
against the position limit. As a result, the TPH's other portfolio 
managers must look to use alternative vehicles to hedge gold or silver 
exposure for the funds under their management. The Exchange understands 
that, unlike GLD or SLV options, most of these alternatives hedging 
vehicles are not a perfect hedge, which creates liquidity issues and 
results in increased trading costs. As a result, the Exchange believes 
that the proposed position limit increases for both GLD and SLV options 
will allow TPHs to effectively hedge their total gold or silver 
exposure without having to seek other, less precise hedging vehicles.
    Also, as detailed above, while the Exchange believes that the ADV 
share and option volume for and overall value of GLD and SLV, 
particularly as compared across other ETF options with position limits 
currently set at 500,000 contracts, are large enough to absorb 
potential price movements caused by a large trade in GLD and SLV, the 
Exchange also recognizes that the spot metal markets underlying SLV and 
GLD differ from the equities markets underlying EWZ, EWJ, TLT and HYG. 
However, the Exchange does not believe these differences warrant the 
position limits for options on GLD and SLV to be half the size of the 
position limits of these options, nor does it believe that a position 
limit increase for options on GLD and SLV will have any adverse impact 
on the underlying spot gold or silver market.\14\
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    \14\ Amendment No. 2 [sic] adds additional support for 
increasing position limits for options on GLD and SLV by providing 
data and analysis regarding the sufficient size and capacity of the 
related spot metals markets to absorb a potential increase in demand 
of GLD and SLV options and delivery of the underlying.
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    The Exchange reviewed the amount and value of the gold and silver 
reserves estimated to be held across the globe,\15\ as well as the 
amount and value held in the London vaults, compared with the amount 
and value of open interest in SLV and GLD options. Currently, the 
world's reserves hold approximately 1.7 billion troy ounces of gold (a 
value of approximately $3 trillion) and 16.1 billion troy ounces of 
silver (a value of approximately $398.7 billion).\16\ Reserves in this 
context is the amount of gold and silver that is ``currently economic'' 
and could be developed to the point of business needs (e.g., could be 
refined by accredited LBMA refiners into new London Good Delivery 
(``LGD'') bars, which is the gold and silver that, respectively, is 
held on behalf of the GLD and SLV trusts and underly GLD and SLV 
shares). That is, the amount of gold and silver reserves is 
notwithstanding the amount of gold and silver already refined and 
currently in circulation or held by various entities (e.g., 
international dealers, mining companies, central banks, and financial 
institutions).\17\ Given the constant mining, manufacturing and 
circulation of gold and silver, the vast number and types of entities 
that deal in and hold gold and silver across the globe,\18\ and the 
lack of any universal framework for international reporting on or 
accounting for gold or silver or other central source that tracks and 
publishes a complete total of available gold and silver, the Exchange 
has no way of knowing the total amount of LGD gold or silver bars 
currently available worldwide. While LBMA publishes the gold and silver 
amounts held in the London vaults \19\ in an effort to improve 
transparency in the precious metals markets, the Exchange notes that, 
for the same reasons above, it has no way of definitively knowing what 
portion of the world's total gold and silver is currently held in the 
London vaults. The London vaults hold \20\ approximately 312.1 million 
troy ounces of gold (a value of approximately $541.8 billion) and 1.2 
million troy ounces of silver (a value of approximately $29.1 billion). 
The Exchange additionally notes that the total global mined silver 
output is forecasted to grow by approximately 8% from 2020 through 2021 
to a total output of approximately 848.5 million troy ounces 
(approximately $19.1 billion in value),\21\ and that total global mined 
gold output as of June 2021 was 104.4 million troy ounces 
(approximately $183.6 billion in value).\22\
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    \15\ See National Minerals Information Center, Gold Statistics 
and Information, Mineral Commodity Summaries, Gold (January 2021) 
available at https://pubs.usgs.gov/periodicals/mcs2021/mcs2021-gold.pdf; and Silver Statistics and Information, Mineral Commodity 
Summaries, Silver (January 2021) available at https://pubs.usgs.gov/periodicals/mcs2021/mcs2021-silver.pdf.
    \16\ One metric ton equals 32,150.7 troy ounces.
    \17\ The amount of gold and silver reserves is also 
notwithstanding LGD bars produced by LBMA-accredited refiners from 
old gold scrap and non-accredited bars.
    \18\ Many of which, for security reasons, do not publish 
information regarding their holdings.
    \19\ The custodians of the GLD and SLV trusts each maintain the 
respective trust's holdings in the London vaults, among other 
locations.
    \20\ As of September 30, 2021.
    \21\ See The Silver Institute, World Silver Survey (April 2021) 
available at https://www.silverinstitute.org/wp-content/uploads/2021/04/World-Silver-Survey-2021.pdf.
    \22\ See World Gold Council, Data, Demand and Supply, Gold mine 
production (June 16, 2021) available at https://www.gold.org/goldhub/data/historical-mine-production.
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    GLD options have experienced an average daily open interest in 2021 
\23\ of approximately 3 million contracts, which equates to 
approximately 302.5 million GLD shares \24\ (an average daily total NAV 
\25\ of approximately $60 billion). SLV options have experienced an 
average daily open interest of approximately 6.3 million contracts, 
which equates to approximately 628.3

[[Page 73357]]

million SLV shares \26\ (an average daily total NAV \27\ of 
approximately $15 billion). Hypothetically, even if every open GLD and 
SLV option contract was exercised at once to receive delivery of the 
underlying shares and all such underlying shares were redeemed with the 
issuer for the respective underlying physical metal, by taking the 
average daily total NAV of the ETF shares equivalent to the average 
daily open interest in GLD and SLV options over the spot price of gold 
($1736.04) and silver ($24.80),\28\ the Exchange estimates that 
redemption of all of the ETF shares (equivalent to the average daily 
open interest in GLD and SLV options) would correspond to delivery of 
approximately 29.4 million troy ounces of gold and 603.9 million troy 
ounces of silver--that is, only approximately 1.7% and 3.8% of the 
total gold and silver reserves, respectively, and approximately 9.4% 
and 51.5% of the gold and silver holdings, respectively, in the London 
vaults. As such, even if this hypothetical, unlikely event occurred, it 
would impact only a negligible portion of the world's gold and silver 
reserves, a fraction of the gold stored in the London vaults, and, in 
an extreme worst-case scenario, half of the silver in the London 
vaults; which, as stated, does not account for the total amount of LGD 
bars available globally nor the amount of reserves readily at hand to 
refine into LGD bars. The Exchange understands that market participants 
by and large use GLD and SLV options to hold a leveraged position in 
the market, taking a view of market performance over a defined period 
of time, or use such options to hedge or reduce the risk exposure of 
their portfolios, as described above. As such, most positions in GLD 
and SLV options are not intended to be exercised to receive delivery of 
the underlying shares, but instead, are closed out or rolled. The 
Exchange also notes that most of the activity in the underlying GLD and 
SLV shares takes place on the secondary market (e.g., on an exchange), 
as opposed to the primary market (i.e., ETF creations and redemptions). 
The Exchange believes that, given the typical use cases for GLD and SLV 
options, an increase in the position limits for GLD and SLV options 
would cause a de minimis increase, if any, in delivery or in creations 
and redemptions of shares in the underlying ETFs. As a result of the 
above-described review of the average daily open options interest 
compared to the world's metal reserves and the holdings in the London 
vaults, as well as the global mined gold and silver output, coupled 
with the understanding that the principal use cases for taking 
positions in the GLD and SLV options markets do not involve taking 
delivery of the underlying, the Exchange believes that the current 
supply of spot gold and silver is more than adequate to meet a 
potential increase in demand and delivery of GLD's and SLV's underlying 
metals components as a result of position limit increases for options 
on GLD and SLV.
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    \23\ Year-to-date daily average open interest through September 
2021.
    \24\ One GLD/SLV option contract equals 100 GLD/SLV shares.
    \25\ Year-to-date daily average GLD share NAV through September 
2021 is $168.47.
    \26\ See supra note 22.
    \27\ Year-to-date daily average GLD share NAV through September 
2021 is $23.84.
    \28\ Spot prices as of October 3, 2021.
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    Indeed, the gold and silver markets have proven resilient in the 
face of actual, extraordinary economic and market events that have 
resulted in an increase in demand for physical gold and silver and in 
holdings of such metal-based products. For example, beginning in March 
2020, interest in gold and silver significantly increased as a result 
of the COVID-19 pandemic, and gold and silver price momentum continued 
through the year, peaking in August 2020.\29\ Gold-backed exchange-
traded products (``ETPs'') accounted for almost two-thirds of total 
gold-related investment demand during the first three quarters of 
2020,\30\ and inflows into silver-backed ETPs over the first three 
quarters of 2020 nearly tripled the amount of inflow over the same 
period of time in 2019.\31\ In particular, GLD experienced an inflow of 
approximately $15.4 billion in assets (or approximately 7.3 million 
troy ounces) in 2020; a 35% increase in AUM from 2019, and SLV 
experienced an inflow of approximately $8.3 billion in assets (or 
approximately 196 million troy ounces) in 2020; a 126% increase in AUM 
from 2019. Open interest in GLD options from the onset of the pandemic 
in March 2020 was approximately 3.7 million contracts and in SLV 
options was approximately 4.2 million contracts, and in August 2020, 
when prices peaked, open interest in GLD options was approximately 4.9 
million contracts and in SLV options was approximately 8.2 million 
contracts. Additionally, in late January and into early February 2021, 
silver-backed inflows increased again, triggered by comments 
coordinated across social media platforms in an attempt to push silver 
higher, and silver-backed ETP holdings (including in SLV) jumped by 
almost 120 million troy ounces \32\ and open interest in SLV options 
was approximately 6.7 million contracts.
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    \29\ See World Gold Council, Global gold-backed ETF flows, Full 
Year 2020 (January 13, 2021) available at https://www.gold.org/goldhub/data/global-gold-backed-etf-holdings-and-flows/2020/december; and supra note 24 [sic] at 8.
    \30\ See World Gold Council, Global gold-backed ETF flows, Full 
Year 2020 (January 13, 2021) available at https://www.gold.org/goldhub/data/global-gold-backed-etf-holdings-and-flows/2020/december.
    \31\ See The Silver Institute, Inflows into silver-backed 
exchange-traded products nearly triple year-on-year over the first 
three quarters of 2020 (October 15, 2020) available at https://www.silverinstitute.org/inflows-silver-backed-exchange-traded-products-nearly-triple-year-year-first-three-quarters-2020/.
    \32\ See supra note 24 [sic] at 22.
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    From March 2020 through August 2020, the amount of LGD bars held in 
the London vaults averaged approximately 278.1 million troy ounces in 
gold and approximately 1.13 billion troy ounces in silver month-to-
month. For the immediately preceding six-month period (September 2019 
through February 2020), the average monthly amount of gold held in the 
London vaults was approximately 267.3 million troy ounces and the 
average monthly amount of silver held was 1.16 billion troy ounces, 
thus demonstrating that, faced with such a significant increase in 
demand for gold, silver and related products as experienced during the 
onset and more economically turbulent period of the COVID-19 pandemic 
and as demonstrated by the inflows into GLD and SLV, the London vaults 
experienced no reduction in its gold holdings (in fact, the average 
month vault holdings increased) and only a marginal reduction in its 
silver holdings. Likewise, across January and February 2021, the silver 
holdings in the London vaults averaged 1.11 billion troy ounces, while 
over the two months prior to this time frame the London vaults averaged 
1.08 billion troy ounces. As such, the Exchange believes that an 
increase in gold and silver ETP and options holdings does not 
necessarily impact physical gold and silver supplies and that such 
supplies have sufficient capacity to meet potential increases in demand 
for gold- and silver-related products, including GLD and SLV options.
    The Exchange also reviewed the gold and silver futures markets, the 
volume and value of which the Exchange believes indicate sufficient 
size and liquidity in the underlying markets to absorb potential price 
movements and large-sized trades as a result of position limit 
increases for options on GLD and SLV. The Exchange notes that gold 
futures currently have a value of approximately $93.2 billion in open 
interest and have experienced an ADV of approximately 264,000 contracts 
(equivalent to approximately 264 million GLD contracts) in 2021 to

[[Page 73358]]

date.\33\ Also, gold futures are currently subject to a position limit 
of 6,000 contracts, which is notionally equivalent to 6,000,000 GLD 
contracts. Additionally, the Exchange understands that its Market-
Makers use both GLD and gold futures to hedge their GLD options 
positions, which the Exchange believes provides for a balance across 
the gold-related marketplaces, mitigating potential concern that either 
the underlying or the futures market might experience additional 
pressure as a result of an increase in activity in the GLD options 
space. Likewise, the Exchange notes that silver futures currently have 
a value of approximately $25.7 billion in open interest, have 
experienced an ADV of approximately 93,000 contracts (equivalent to 
approximately 465 million SLV contracts) in 2021 to date,\34\ and are 
currently subject to a position limit of 3,000 contracts, which is 
notionally equivalent to 15,000,000 SLV contracts. The Exchange 
believes the robust volume in and value of the gold and silver futures 
markets indicates that the underlying markets are sufficiently large 
and liquid enough to absorb potential price movements and large-sized 
trades as a result of position limit increases for options on GLD and 
SLV.
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    \33\ Year-to-date ADV through May 2021.
    \34\ See id.
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    Additionally, the Exchange reviewed the volume-weighted average of 
the absolute value \35\ of deltas for GLD and SLV options trades over 
approximately the last two years (from March 2019 through June 2021). 
Essentially, the delta compares the relationship between the change in 
the price of an underlying and of an option. Absolute delta value 
ranges from 0 to 1. The lower the absolute delta value, the less the 
option price is sensitive to changes in the price of the underlying 
(i.e., delta exposure). Conversely, the higher the absolute delta 
value, the more the option price will change given a change in the 
underlying price. The Exchange believes that volume-weighted average 
delta over time is indicative as to whether an underlying market is 
large enough to absorb increased activity in the related options 
markets. That is, the more delta exposure per trade, the more options 
exposure there is that necessitates a hedge trade in the underlying, 
which may, in turn, potentially increase the impact on the underlying 
markets. Review of the volume-weighted average delta in connection with 
GLD and SLV options over the last two years showed that the average 
absolute delta per trade for GLD options trades was approximately 0.34 
and for SLV options trades was approximately 0.28. The Exchange notes 
that both averages indicate relatively minimal amounts of average delta 
exposure and, thus, minimal amounts of GLD and SLV options exposure 
need to be hedged, on average. As a result, the Exchange believes that 
increases in GLD and SLV options trading would have minimal impact on 
the ability of the underlying metals markets to absorb any additional 
volume related to increased position limits and hedging activity.
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    \35\ Put deltas are always negative, therefore, absolute value 
is used to view the average delta across calls and puts.
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Creation and Redemption for ETFs
    The Exchange believes that the creation and redemption process for 
the Underlying ETFs lessens the potential for manipulative activity 
with options on the Underlying ETFs. When an ETF provider wants to 
create more shares, it looks to an Authorized Participant (``AP'') 
(generally a market maker or other large financial institution) to 
acquire the underlying components the ETF is to hold. For instance, 
when an ETF is designed to track the performance of an index, the AP 
can purchase all the constituent securities in the exact same weight as 
the index, then deliver those shares to the ETF provider. In exchange, 
the ETF provider gives the AP a block of equally valued ETF shares, on 
a one-for-one fair value basis. The price is based on the NAV, not the 
market value at which the ETF is trading. The creation of new ETF units 
can be conducted during an entire trading day and is not subject to 
position limits. This process works in reverse where the ETF provider 
seeks to decrease the number of shares that are available to trade. The 
creation and redemption processes for the Underlying ETFs creates a 
direct link to the underlying components of the ETF and serves to 
mitigate potential price impact of the ETF shares that might otherwise 
result from increased position limits for the options on the Underlying 
ETFs.
    The Exchange understands that the ETF creation and redemption 
processes seek to keep an ETF's share price trading in line with the 
product's underlying net asset value. Because an ETF trades like a 
stock, its share price will fluctuate during the trading day, due to 
simple supply and demand. If demand to buy an ETF is high, for 
instance, an ETF's share price might rise above the value of its 
underlying components. When this happens, the AP or issuer believes the 
ETF may now be overpriced, so it may buy shares of the component assets 
and then sell ETF shares in the open market. This may drive the ETF's 
share price back toward the underlying net asset value. Likewise, if an 
ETF share price starts trading at a discount to the component assets it 
holds, the AP or issuer can buy shares of the ETF and redeem them for 
the underlying components. Buying undervalued ETF shares may drive the 
share price of an ETF back toward fair value. This arbitrage process 
helps to keep an ETF's share price in line with the value of its 
underlying portfolio.
Surveillance and Reporting Requirements
    The Exchange believes that increasing the position limits for the 
options on the Underlying ETFs would lead to a more liquid and 
competitive market environment for these options, which will benefit 
customers interested in trading these products. The reporting 
requirement for the options on the Underlying ETFs would remain 
unchanged. Thus, the Exchange would still require that each TPH or TPH 
organization that maintains positions in the options on the same side 
of the market, for its own account or for the account of a customer, 
report certain information to the Exchange. This information would 
include, but would not be limited to, the options' positions, whether 
such positions are hedged and, if so, a description of the hedge(s). 
Market-Makers \36\ (including Designated Primary Market-Makers 
(``DPMs'')) \37\ would continue to be exempt from this reporting 
requirement, however, the Exchange may access Market-Maker position 
information.\38\ Moreover, the Exchange's requirement that TPHs file 
reports with the Exchange for any customer who held aggregate large 
long or short positions on the same side of the market of 200 or more 
option contracts of any single class for the

[[Page 73359]]

previous day will remain at this level for the options subject to this 
proposal and will continue to serve as an important part of the 
Exchange's surveillance efforts.\39\
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    \36\ A Market-Maker [sic] ``Trading Permit Holder registered 
with the Exchange pursuant to Rule 3.52 for the purpose of making 
markets in option contracts traded on the Exchange and that has the 
rights and responsibilities set forth in Chapter 5, Section D of the 
Rules.'' See Rule 1.1.
    \37\ A Designated Primary Market-Maker ``is TPH organization 
that is approved by the Exchange to function in allocated securities 
as a Market-Maker (as defined in Rule 8.1) and is subject to the 
obligations under Rule 5.54 or as otherwise provided under the rules 
of the Exchange.'' See Rule 1.1.
    \38\ The Options Clearing Corporation (``OCC'') through the 
Large option Position Reporting (``LOPR'') system acts as a 
centralized service provider for TPH compliance with position 
reporting requirements by collecting data from each TPH or TPH 
organization, consolidating the information, and ultimately 
providing detailed listings of each TPH's report to the Exchange, as 
well as Financial Industry Regulatory Authority, Inc. (``FINRA''), 
acting as its agent pursuant to a regulatory services agreement 
(``RSA'').
    \39\ See Rule 8.43 for reporting requirements.
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    The Exchange believes that the existing surveillance procedures and 
reporting requirements at the Exchange and other SROs are capable of 
properly identifying disruptive and/or manipulative trading activity. 
The Exchange also represents that it has adequate surveillances in 
place to detect potential manipulation, as well as reviews in place to 
identify potential changes in composition of the Underlying ETFs and 
continued compliance with the Exchange's listing standards. These 
procedures utilize daily monitoring of market activity via automated 
surveillance techniques to identify unusual activity in both options 
and the underlyings, as applicable.\40\ The Exchange also notes that 
large stock holdings must be disclosed to the Commission by way of 
Schedules 13D or 13G,\41\ which are used to report ownership of stock 
which exceeds 5% of a company's total stock issue and may assist in 
providing information in monitoring for any potential manipulative 
schemes.
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    \40\ The Exchange believes these procedures have been effective 
for the surveillance of trading the options subject to this proposal 
and will continue to employ them.
    \41\ 17 CFR 240.13d-1.
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    The Exchange believes that the current financial requirements 
imposed by the Exchange and by the Commission adequately address 
concerns regarding potentially large, unhedged positions in the options 
on the Underlying ETFs. Current margin and risk-based haircut 
methodologies serve to limit the size of positions maintained by any 
one account by increasing the margin and/or capital that a TPH must 
maintain for a large position held by itself or by its customer.\42\ In 
addition, Rule 15c3-1 \43\ imposes a capital charge on TPHs to the 
extent of any margin deficiency resulting from the higher margin 
requirement.
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    \42\ See Rule 10.3 for a description of margin requirements.
    \43\ 17 CFR 240.15c3-1.
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of Section 6(b) of the Act.\44\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \45\ requirements that the rules of an exchange be 
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 
mechanism 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) \46\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \44\ 15 U.S.C. 78f(b).
    \45\ 15 U.S.C. 78f(b)(5).
    \46\ Id.
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    The Exchange believes that the proposed increase in position limits 
for options on GLD and SLV will remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, protect investors and the public interest, because it will 
provide market participants with the ability to more effectively 
execute their trading and hedging activities. The proposed increases 
will allow market participants to more fully implement hedging 
strategies in related derivative products and to further use options to 
achieve investment strategies (e.g., there are other ETPs that use 
options on GLD and SLV as part of their investment strategy, and the 
applicable position limits as they stand today may inhibit these other 
ETPs in achieving their investment objectives, to the detriment of 
investors). Also, increasing the applicable position limits may allow 
Market-Makers to provide the markets for these options with more 
liquidity in amounts commensurate with increased consumer demand in 
such markets. The proposed position limit increases may also encourage 
other liquidity providers to shift liquidity, as well as encourage 
consumers to shift demand, from OTC markets onto the Exchange, which 
will enhance the process of price discovery conducted on the Exchange 
through increased order flow.
    In addition, the Exchange believes that the structure of the 
Underlying ETFs, the considerable market capitalization of the funds, 
capacity of the underlying component assets, and liquidity of the 
markets for the applicable options and underlying shares will mitigate 
concerns regarding potential manipulation of the products and/or 
disruption of the underlying markets upon increasing the relevant 
position limits. As a general principle, increases in market 
capitalizations, active trading volume, and deep liquidity of the 
underlying markets do not lead to manipulation and/or disruption. This 
general principle applies to the recently observed increased levels of 
market capitalization and trading volume and liquidity in shares of and 
options on the Underlying ETFs (as described above). As a result, the 
Exchange does not believe that the options markets or underlying 
markets would become susceptible to manipulation and/or disruption as a 
result of the proposed position limit increases. Indeed, the Commission 
has previously expressed the belief that not just increasing, but 
removing, position and exercise limits may bring additional depth and 
liquidity to the options markets without increasing concerns regarding 
intermarket manipulation or disruption of the options or the underlying 
securities.\47\
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    \47\ See Securities Exchange Act Release No. 62147 [sic] 
(October 28 [sic], 2005) (SR-CBOE-2005-41), at 62149.
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    Further, the Exchange notes that the proposed rule change to 
increase position limits for select actively traded options is not 
novel and the Commission has approved similar proposed rule changes by 
the Exchange to increase position limits for options on similar, highly 
liquid and actively traded ETPs.\48\ Furthermore, the Exchange again 
notes that that the proposed position limits for options on GLD and SLV 
are consistent with existing position limits for options on other ETFs 
in Rule 8.30.07, including options on ETFs that experience similar, or 
even less, volume than GLD and SLV options, as demonstrated above.
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    \48\ See Securities Exchange Act Release Nos. 88768 (April 29, 
2020), 85 FR 26736 (May 5, 2020) (SR-CBOE-2020-015); 83415 (June 12, 
2018), 83 FR 28274 (June 18, 2018) (SR-CBOE-2018-042); and 68086 
(October 23, 2012), 77 FR 65600 (October 29, 2012) (SR-CBOE-2012-
066).
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    The Exchange's surveillance and reporting safeguards continue to be 
designed to deter and detect possible manipulative behavior that might 
arise from increasing or eliminating position and exercise limits in 
certain classes. The Exchange believes that the current financial 
requirements imposed by the Exchange and by the Commission adequately 
address concerns regarding potentially large, unhedged position in the 
options on the Underlying ETFs, further promoting just and equitable 
principles of trading, the maintenance of a fair and orderly market, 
and the protection of investors.

[[Page 73360]]

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. The Exchange does not 
believe the proposed rule change will impose any burden on intramarket 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act because the increased position limits (and exercise 
limits) will be available to all market participants and apply to each 
in the same manner. The Exchange believes that the proposed rule change 
will provide additional opportunities for market participants to more 
efficiently achieve their investment and trading objectives of market 
participants. The proposed rule change would also align the position 
limits for GLD and SLV options with the position limits for other ETF 
options, which, as demonstrated herein, experience similar, or even 
less, volume than options on GLD and SLV.
    The Exchange does not believe that the proposed rule change will 
impose any burden on intermarket competition that is not necessary or 
appropriate in furtherance of the Act. On the contrary, the Exchange 
believes the proposal promotes competition because it may attract 
additional order flow from the OTC market to exchanges, which would in 
turn compete amongst each other for those orders.\49\ The Exchange 
believes market participants would benefit from being able to trade 
options with increased position limits in an exchange environment in 
several ways, including but not limited to the following: (1) Enhanced 
efficiency in initiating and closing out position; (2) increased market 
transparency; and (3) heightened contra-party creditworthiness due to 
the role of OCC as issuer and guarantor. The Exchange notes that other 
options exchanges may choose to file similar proposals with the 
Commission to increase position limits on options on the Underlying 
ETFs.
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    \49\ Additionally, several other options exchanges have the same 
position limits as the Exchange, as they incorporate by reference to 
the Exchange's position limits, and as a result the position limits 
for options on the Underlying ETFs will increase at those exchanges. 
For example, Nasdaq Options position limits are determined by the 
position limits established by the Exchange. See Nasdaq Stock Market 
LLC Rules, Options 9, Sec. 13 (Position Limits).
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange neither solicited nor received comments on 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 up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange 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
     Send an email to [email protected]. Please include 
File Number SR-CBOE-2021-075 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-CBOE-2021-075. 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-CBOE-2021-075 and should be submitted on 
or before January 18, 2022.
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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\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2021-27924 Filed 12-23-21; 8:45 am]
BILLING CODE 8011-01-P