Document ID: SEC-2019-0357-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: MIAX PEARL, LLC
Posted Date: 2019-03-28T04:00Z

[Federal Register Volume 84, Number 60 (Thursday, March 28, 2019)]
[Notices]
[Pages 11847-11850]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-05923]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85397; File No. SR-PEARL-2019-04]

Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing 
and Immediate Effectiveness of a Proposed Rule Change To Amend Exchange 
Rule 507, Must Give Up Clearing Member, and Rule 513, Submission of 
Orders and Clearance of Transactions

March 22, 2019.
    Pursuant to the provisions of Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on March 11, 2019, MIAX PEARL, LLC (``MIAX PEARL'' 
or the ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change as described in Items I and II 
below, which Items have been prepared by the Exchange. The Commission 
is publishing this notice to solicit comments on the proposed rule 
change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is filing a proposal to amend Rule 507, Must Give Up 
Clearing Member, and Rule 513, Submission of Orders and Clearance of 
Transactions, in order to codify the requirement that for each 
transaction in which a Member \3\ participates, the Member may indicate 
the name of any Clearing Member \4\ through which the transaction will 
be cleared (``Give Up''), and to establish a new ``Opt In'' process by 
which a Clearing Member can restrict one or more of its OCC numbers and 
thereafter designate certain Members as authorized to Give Up a 
restricted clearing number.
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    \3\ The term ``Member'' means an individual or organization 
approved to exercise the trading rights associated with a Trading 
Permit. Members are deemed ``members'' under the Exchange Act. See 
Exchange Rule 100.
    \4\ The term ``Clearing Member'' means a Member that has been 
admitted to membership in the Clearing Corporation pursuant to the 
provisions of the rules of the Clearing Corporation. See Exchange 
Rule 100.
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    The text of the proposed rule change is available on the Exchange's 
website at http://www.miaxoptions.com/rule-filings/pearl at MIAX 
PEARL's principal office, and at the Commission's Public Reference 
Room.

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

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

1. Purpose
    The Exchange proposes to amend its requirements in MIAX PEARL Rule 
507 and Rule 513, related to the give up of a Clearing Member by a 
Member on Exchange transactions. By way of background, to enter 
transactions on the Exchange, a Member must either be a Clearing Member 
or must have a Clearing Member agree to accept financial responsibility 
for all of its transactions. Additionally, Rule 507 currently provides 
that when a Member executes a transaction on the Exchange, it must give 
up the name of a Clearing Member (the ``Give Up'') through which the 
transaction will be cleared (i.e., ``give up''). The Exchange believes 
that this proposal would result in the fair and reasonable use of 
resources by both the Exchange and the Member. In addition, the 
proposed change would align the Exchange with competing options 
exchanges that have proposed rules consistent with this proposal.\5\
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    \5\ See Securities Exchange Act Release No. 84624 (November 19, 
2018), 83 FR 60547 (November 26, 2018) (SR-Phlx-2018-72) (Notice of 
Filing of Proposed Rule Change to Establish Rules Governing the Give 
Up of a Clearing Member by a Member Organization on Exchange 
Transactions). See also Securities Exchange Act Release No. 84981 
(January 9, 2019), 84 FR 837 (January 31, 2019) (SR-Phlx-2018-72) 
(Notice of Designation of a Longer Period for Commission Action on a 
Proposed Rule Change To Establish Rules Governing the Give Up of a 
Clearing Member by a Member Organization on Exchange Transactions). 
See also Securities Exchange Act Release No. 85136 (February 14, 
2019) (SR-Phlx-2018-72)(Order Approving a Proposed Rule Change to 
Establish Rules Governing the Give Up of a Clearing Member by a 
Member Organization on Exchange Transactions).
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    Recently, certain Clearing Members, in conjunction with the 
Securities Industry and Financial Markets Association (``SIFMA''), 
expressed concerns related to the process by which executing brokers on 
U.S. options

[[Page 11848]]

exchanges (``Exchanges'') are allowed to designate or `give up' a 
clearing firm for the purposes of clearing particular transactions. The 
SIFMA-affiliated Clearing Members have recently identified the current 
give up process as a significant source of risk for clearing firms, and 
subsequently requested that the Exchanges alleviate this risk by 
amending Exchange rules governing the give up process.\6\
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    \6\ See id.
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Proposed Rule Change
    Based on the above, the Exchange now seeks to amend its rules 
regarding the current give up process in order to allow a Clearing 
Member to opt in, at The Options Clearing Corporation (``OCC'') 
clearing number level, to a feature that, if enabled by the Clearing 
Member, will allow the Clearing Member to specify which Members are 
authorized to give up that OCC clearing number. As proposed, Rule 507 
will be amended to provide that for each transaction in which a Member 
participates, the Member may indicate the name of any Clearing Member 
through which the transaction will be cleared (``Give Up''), provided 
the Clearing Member has not elected to ``Opt In'', as defined in 
paragraph (b) of the proposed Rule, and restricted one or more of its 
OCC number(s) (``Restricted OCC Number'').\7\ A Member may Give Up a 
Restricted OCC Number provided the Member has written authorization as 
described in paragraph (b)(2) (``Authorized Member'').
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    \7\ Today, electronic trades need a valid mnemonic, which is 
only set up if there is a clearing arrangement already in place 
through a Letter of Guarantee. As such, electronic trades 
automatically clear through the guarantor associated with the 
mnemonic at the time of the trade, so a Member may only amend its 
Give Up post-trade. As proposed, the Exchange will also restrict the 
post-trade allocation portion of an electronic trade systematically. 
See note 10 below.
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    Proposed Rule 507(b) provides that Clearing Members may request the 
Exchange restrict one or more of their OCC clearing numbers (``Opt 
In'') as described in subparagraph (b)(1) of Rule 507. If a Clearing 
Member Opts In, the Exchange will require written authorization from 
the Clearing Member permitting a Member to Give Up a Clearing Member's 
Restricted OCC Number. An Opt In would remain in effect until the 
Clearing Member terminates the Opt In as described in subparagraph (3). 
If a Clearing Member does not Opt In, that Clearing Member's OCC number 
may be subject to Give Up by any Member.
    Proposed Rule 507(b)(1) will set forth the process by which a 
Clearing Member may Opt In. Specifically, a Clearing Member may Opt In 
by sending a completed ``Clearing Member Restriction Form'' listing all 
Restricted OCC Numbers and Authorized Members.\8\ A copy of the 
proposed form is attached in Exhibit 3. A Clearing Member may elect to 
restrict one or more OCC clearing numbers that are registered in its 
name at OCC. The Clearing Member would be required to submit the 
Clearing Member Restriction Form to the Exchange's Membership 
Department as described on the form. Once submitted, the Exchange 
requires ninety days before a Restricted OCC Number is effective within 
the System. This time period is to provide adequate time for the Member 
users of that Restricted OCC Number who are not initially specified by 
the Clearing Member as Authorized Members to obtain the required 
written authorization from the Clearing Member for that Restricted OCC 
Number. Such Member users would still be able to Give Up that 
Restricted OCC Number during the ninety day period (i.e., until the 
number becomes restricted within the System).
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    \8\ This form will be available on the Exchange's website. The 
Exchange will also maintain, on its website, a list of the 
Restricted OCC Numbers, which will be updated on a regular basis, 
and the Clearing Member's contact information to assist Members (to 
the extent they are not already Authorized Members) with requesting 
authorization for a Restricted OCC Number. The Exchange may utilize 
additional means to inform its Members of such updates on a periodic 
basis.
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    Proposed Rule 507(b)(2) will set forth the process for Members to 
Give Up a Clearing Member's Restricted OCC Number. Specifically, a 
Member desiring to Give Up a Restricted OCC Number must become an 
Authorized Member.\9\ The Clearing Member will be required to authorize 
a Member as described in subparagraph (1) or (3) of Rule 507(b) (i.e., 
through an Clearing Member Restriction Form), unless the Restricted OCC 
Number is already subject to a Letter of Guarantee that the Member is a 
party to, as set forth in Rule 507(d).
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    \9\ The Exchange will develop procedures for notifying Members 
that they are authorized or unauthorized by Clearing Members.
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    Pursuant to proposed Rule 507(b)(3), a Clearing Member may amend 
the list of its Authorized Members or Restricted OCC Numbers by 
submitting a new Clearing Member Restriction Form to the Exchange's 
Membership Department indicating the amendment as described on the 
form. Once a Restricted OCC Number is effective within the System 
pursuant to Rule 507(b)(1), the Exchange may permit the Clearing Member 
to authorize, or remove from authorization for, a Member to Give Up the 
Restricted OCC Number intra-day only in unusual circumstances, and on 
the next business day in all regular circumstances. The Exchange will 
promptly notify the Member if they are no longer authorized to Give Up 
a Clearing Member's Restricted OCC Number. If a Clearing Member removes 
a Restricted OCC Number, any Member may Give Up that OCC clearing 
number once the removal has become effective on or before the next 
business day.
    Proposed Rule 507(c) will provide that the System will not allow an 
unauthorized Member to Give Up a Restricted OCC Number. Specifically, 
the System will not allow an unauthorized Give Up with a Restricted OCC 
Number to be submitted at the firm mnemonic level at the point of order 
entry.\10\
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    \10\ Specifically, the System will block the entry of the order 
from the outset. This is because a valid mnemonic will be required 
for any order to be submitted directly to the System, and a mnemonic 
will only be set up for a Member if there is already a clearing 
arrangement in place for that firm either through a Letter of 
Guarantee (as is the case today) or in the case of a Restricted OCC 
Number, the Member becoming an Authorized Member. The System will 
also restrict any post-trade allocation changes if the Member is not 
authorized to use a Restricted OCC Number.
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    Furthermore, the Exchange proposes to adopt paragraph (d) to Rule 
507 to provide, as is the case today, that a clearing arrangement 
subject to a Letter of Guarantee would immediately permit the Give Up 
of a Restricted OCC Number by the Member that is party to the 
arrangement. Since there is an OCC clearing arrangement already 
established in this case, no further action is needed on the part of 
the Clearing Member or the Member.
    The Exchange also proposes to adopt paragraph (e) to Rule 507 to 
provide that an intentional misuse of this Rule is impermissible, and 
may be treated as a violation of Rule 301, titled ``Just and Equitable 
Principles of Trade.'' This language will make clear that the Exchange 
will regulate an intentional misuse of this Rule (e.g., sending orders 
to a Clearing Member's OCC account without the Clearing Member's 
consent), and such behavior would be a violation of Exchange rules.
    Furthermore, the Exchange proposes to adopt paragraph (f) to Rule 
507 to codify that notwithstanding anything to the contrary in the 
proposed rule, if a Clearing Member that a Member has indicated as the 
Give Up rejects a trade, the Clearing Member that has issued a Letter 
of Guarantee pursuant to Rule 209, for such executing Member, shall be 
responsible for the clearance of the subject trade.

[[Page 11849]]

    Finally, the Exchange proposes to amend Rule 513, which addresses 
the financial responsibility of Exchange options transactions clearing 
through Clearing Members, to clarify that this Rule will apply to all 
Clearing Members, regardless of whether or not they elect to Opt In, 
pursuant to proposed Rule 507. Specifically, the Exchange proposes to 
add that Rule 513 will apply to all Clearing Members who either (i) 
have Restricted OCC Numbers with Authorized Members pursuant to Rule 
507, or (ii) have non-Restricted OCC Numbers.
2. Statutory Basis
    MIAX PEARL believes that its proposed rule change is consistent 
with Section 6(b) of the Act \11\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act \12\ 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 
mechanisms of a free and open market and a national market system and, 
in general, to protect investors and the public interest.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
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    Particularly, as discussed above, several clearing firms affiliated 
with SIFMA have recently expressed concerns relating to the current 
give up process, which permits Members to identify any Clearing Member 
as a designated give up for purposes of clearing particular 
transactions, and have identified the current give up process (i.e., a 
process that lacks authorization) as a significant source of risk for 
clearing firms.
    The Exchange believes that the proposed changes to Rule 507 help 
alleviate this risk by enabling Clearing Members to `Opt In' to 
restrict one or more of its OCC clearing numbers (i.e., Restricted OCC 
Numbers), and to specify which Authorized Member may Give Up those 
Restricted OCC Numbers. As described above, all other Members would be 
required to receive written authorization from the Clearing Member 
before they can Give Up that Clearing Member's Restricted OCC Number. 
The Exchange believes that this authorization provides proper 
safeguards and protections for Clearing Members as it provides controls 
for Clearing Members to restrict access to their OCC clearing numbers, 
allowing access only to those Authorized Members upon their request. 
The Exchange also believes that its proposed Clearing Member 
Restriction Form allows the Exchange to receive in a uniform fashion, 
written and transparent authorization from Clearing Members, which 
ensures seamless administration of the Rule.
    The Exchange believes that the proposed Opt In process strikes the 
right balance between the various views and interests across the 
industry. For example, although the proposed rule would require Members 
(other than Authorized Members) to seek authorization from Clearing 
Members in order to have the ability to give them up, each Member will 
still have the ability to Give Up a Restricted OCC Number that is 
subject to a Letter of Guarantee without obtaining any further 
authorization if that Member is party to that arrangement. The Exchange 
also notes that to the extent that the executing Member has a clearing 
arrangement with a Clearing Member (i.e., through a Letter of 
Guarantee), a trade can be assigned to the executing Members 
guarantor.\13\ Accordingly, the Exchange believes that the proposed 
rule change is reasonable and continues to provide certainty that a 
Clearing Member would be responsible for a trade, which protects 
investors and the public interest. Additionally, the Exchange believes 
that adopting paragraph (e) of Rule 507 will make clear that an 
intentional misuse of this Rule (e.g., sending orders to a Clearing 
Member's OCC account without the Clearing Member's consent) will be a 
violation of the Exchange's rules, and that such behavior would subject 
a Member to disciplinary action. For these reasons, the Exchange 
believes that its proposed changes to Rule 507 and Rule 513, is 
consistent with Section 6(b) of the Act in general, and furthers the 
objectives of Section 6(b)(5) of the Act 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 mechanisms of a 
free and open market and a national market system and, in general, to 
protect investors and the public interest, by codifying the requirement 
that for each transaction in a which a Member participates, the Member 
may indicate the name of any Clearing Member through which the 
transaction will be cleared, provided the Clearing Member has not 
elected to Opt In.
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    \13\ See Rule 209 (providing that each Member shall provide a 
letter of guarantee for the Member's trading activities on the 
Exchange from a Clearing Member in a form and manner prescribed by 
the Exchange). See also proposed Rule 507(f).
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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. The Exchange does not 
believe that the proposed rule change will impose an unnecessary burden 
on intra-market competition because it will apply equally to all 
similarly situated Members. The Exchange also notes that, should the 
proposed changes make MIAX PEARL more attractive for trading, market 
participants trading on other exchanges can always elect to become 
Members on MIAX PEARL to take advantage of the trading opportunities.
    Furthermore, the proposed rule change does not address any 
competitive issues and ultimately, the target of the Exchange's 
proposal is to reduce risk for Clearing Members under the current give 
up model. Clearing firms make financial decisions based on risk and 
reward, and while it is generally in their beneficial interest to clear 
transactions for market participants in order to generate profit, it is 
the Exchange's understanding from SIFMA and clearing firms that the 
current process can create significant risk when the clearing firm can 
be given up on any market participant's transaction, even where there 
is no prior customer relationship or authorization for that designated 
transaction.
    In the absence of a mechanism that governs a market participant's 
use of a Clearing Member's services, the Exchange's proposal may 
indirectly facilitate the ability of a Clearing Member to manage their 
existing relationships while continuing to allow market participant 
choice in broker execution services. While Clearing Members may compete 
with executing brokers for order flow, the Exchange does not believe 
this proposal imposes an undue burden on competition. Rather, the 
Exchange believes that the proposed rule change balances the need for 
Clearing Members to manage risks and allows them to address outlier 
behavior from executing brokers while still allowing freedom of choice 
to select an executing broker.

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

    Written comments were neither solicited nor received.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days after the date of the filing, or such 
shorter time as the Commission may designate, it has become effective 
pursuant to 19(b)(3)(A) of the Act \14\ and Rule 19b-4(f)(6) \15\ 
thereunder.
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    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative for 30 days after the date of the filing. However, 
Rule 19b-4(f)(6)(iii) \16\ permits the Commission to designate a 
shorter time if such action is consistent with the protection of 
investors and the public interest. In its filing, MIAX PEARL requested 
that the Commission waive the 30-day operative delay. The Exchange 
represented that the proposal establishes a rule regarding the give up 
of a Clearing Member in order to help clearing firms manage risk while 
continuing to allow market participants choice in broker execution 
services. The Commission notes that it recently approved a 
substantially similar proposed rule change by Nasdaq Phlx LLC.\17\ The 
Commission believes that waiver of the 30-day operative delay is 
consistent with the protection of investors and the public interest, as 
such waiver will provide transparency and operational certainty 
including through the use of a standardized give up process and would 
align the give up process with other option exchanges. Accordingly, the 
Commission waives the 30-day operative delay and designates the 
proposed rule change operative upon filing.\18\
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    \16\ 17 CFR 240.19b-4(f)(6)(iii).
    \17\ See supra note 5.
    \18\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or 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-PEARL-2019-04 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-PEARL-2019-04. 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-PEARL-2019-04 and should be submitted on 
or before April 18, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-05923 Filed 3-27-19; 8:45 am]
BILLING CODE 8011-01-P