Document ID: SEC-2014-0569-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2014-04-07T04:00Z

[Federal Register Volume 79, Number 66 (Monday, April 7, 2014)]
[Notices]
[Pages 19154-19158]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-07636]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71839; File No. SR-NYSEArca-2014-25]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Proposed Rule Change To Make Permanent Its Pilot Program Regarding 
Minimum Value Sizes for Opening Transactions in New Series of 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 Arca, Inc. (the ``Exchange'' or 
``NYSE Arca'') 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 sizes for opening transactions in 
flexible exchange options (``FLEX Options'' or ``FLEX''), currently 
scheduled to expire on March 31, 2014 and establish new minimum value 
sizes applicable to other FLEX transactions and FLEX Quotes. 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.

[[Page 19155]]

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.
    \5\ See Securities Exchange Act Release No. 69267 (April 2, 
2013), 78 FR 20997 (April 8, 2013) (SR-NYSEArca-2013-27).
    \6\ The Pilot Program was initiated on May 12, 2010. See 
Securities Exchange Act Release No. 62054 (May 6, 2010), 75 FR 27381 
(May 14, 2010) (SR-NYSEArca-2010-34).
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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 opening FLEX Request for Quotes and every 
responsive FLEX Quote [sic] under Rule 5.32(d)(2) 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.
    Pursuant to the terms of the existing Pilot Program, 
notwithstanding the above-described rule text, the minimum size for an 
opening transaction in a new FLEX Option series is one contract. As 
mentioned above, the 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 FLEX series, as described above, Rule 5.32(d)(3)-
(4) 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 minimum value size 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 .02 to Rule 5.32, and to eliminate the rule 
text describing the minimum value size requirements, which is contained 
in Rule 5.32(d)(2).
    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.\7\ 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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    \7\ A copy of the Report is attached as Exhibit 3.
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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 has 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

[[Page 19156]]

derivatives markets and regulated exchanges will make both sets of 
markets more efficient and thereby better serve end-users of 
derivatives.\8\
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    \8\ 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 FLEX transactions in new FLEX series on a 
permanent basis would provide FLEX-participating OTP 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 FLEX 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. 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 FLEX 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 at times 
too large to accommodate the needs of OTP 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 
for opening transactions in new FLEX series 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.\9\ In addition, the Exchange notes that FLEX Options are subject 
to the options disclosure document (``ODD'') requirements of Rule 9b-1 
\10\ under the Securities Exchange Act of 1934 (the ``Act'').\11\ 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 OTP Holder organization supervision and 
suitability requirements, such as in Rule 9.2(b) (Account Supervision) 
and Rule 9.18(c) (Suitability).
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    \9\ The Exchange also notes that certain position limit, 
aggregation and exercise limit requirements continue to apply to 
FLEX Options in accordance with Rule 5.35 (Position Limits) and Rule 
5.36. (Exercise Limits). The Commission notes that certain FLEX 
Options do not have position or exercise limits.
    \10\ 17 CFR 240.9b-1.
    \11\ 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 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 is proposing to adopt the 
existing Pilot Program \12\ on a permanent basis. Specifically, the 
Exchange proposes to eliminate all references to minimum size 
applicable to opening FLEX transactions as presently described in Rule 
5.32(d)(2). 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 a similar pilot program on a permanent 
basis.\13\
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    \12\ See supra note 5.
    \13\ See Securities Exchange Act Release Nos. 66934 (May 7, 
2012), 77 FR 27822 (May 11, 2012); 67624 (August 8, 2012), 77 FR 
48580 (Aug 14, 2012), (SR-CBOE-2012-040).
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    Present Rules 5.32(d)(3)-(4) govern the minimum value sizes for 
FLEX Equity and FLEX Index Options transactions in currently opened 
FLEX series and FLEX Quotes in response to a Request for Quotes 
(``RFQ''). Subsection (3) establishes minimum value sizes of 100 
contracts and 25 contracts respectively, for opening and closing FLEX 
Equity transactions in any currently-opened FLEX series and $1 million 
Underlying Equivalent Value in the case of FLEX Index transactions or, 
in either case the remaining underlying size or Underlying Equivalent 
Value on a closing transaction, whichever is less. Subsection (4) 
states the minimum value size for FLEX Quotes responsive to an 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 in 
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 an RFQ. This change, coupled 
with the proposed change to the minimum value size for opening 
transactions 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 
transactions and FLEX Quotes is based on similar rules governing 
minimum value size for FLEX Options approved for the CBOE.\14\
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    \14\ See supra note 13.
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    Adopting the same minimum value size for all FLEX transactions and 
FLEX Quotes would afford market

[[Page 19157]]

participants, both those trading in new a FLEX series, and those 
trading in an existing FLEX series, equal opportunity to tailor FLEX 
transactions and FLEX Quotes 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 
present Rule 5.32(d)(2) and does not include data for transactions 
pursuant to subsections (3)-(4) 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 also 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 Exchange's 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 FLEX Quotes 
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, and therefore 
should be adopted on a permanent basis.
    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 a permanent basis.
    In conjunction with the above proposed changes, the Exchange is 
proposing certain non-substantive changes to reorganize the rule text. 
In particular, text from Rule 5.32(d)(1) pertaining to the maximum 15-
year term for a FLEX Option would be relocated and renumbered as Rule 
5.32(b)(6). As proposed, Rule 5.32(b)(6) would state that the maximum 
term for both equity and index FLEX Options shall be 15 years. In 
addition, the Exchange proposes to relocate the relevant text 
pertaining to the minimum value size for FLEX Options from Commentary 
.02 and renumber it as Rule 5.32(b)(7). As proposed, Rule 5.32(b)(7) 
would state that the minimum value size for all FLEX Options 
transaction shall be 1 contract. 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, 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 FLEX 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 FLEX transactions and FLEX Quotes, thus affording 
all market participants with an equal opportunity to tailor FLEX 
transactions and FLEX quotes 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, affording market 
participants on NYSE Amex Options [sic] the same 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 in use at 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 of the CBOE will allow NYSE Arca 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.

[[Page 19158]]

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-NYSEArca-2014-25 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-NYSEArca-2014-25. 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-NYSEArca-2014-25 and should 
be submitted on or before April 28, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-07636 Filed 4-4-14; 8:45 am]
BILLING CODE 8011-01-P