Document ID: SEC-2018-1960-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2018-12-20T05:00Z

[Federal Register Volume 83, Number 244 (Thursday, December 20, 2018)]
[Notices]
[Pages 65386-65389]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-27509]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84826; File No. SR-NYSEArca-2018-25]

Self-Regulatory Organizations; NYSE Arca, Inc.; Order Approving a 
Proposed Rule Change, as Modified by Amendment No. 2, Regarding the 
Continued Listing and Trading of Shares of the Natixis Loomis Sayles 
Short Duration Income ETF

December 14, 2018.

I. Introduction

    On April 16, 2018, NYSE Arca, Inc. (``Exchange'' or ``NYSE Arca'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 1934 
(``Act'') \2\ and Rule 19b-4 thereunder,\3\ a proposed rule change to 
amend the listing requirements applicable to the shares (``Shares'') of 
the Natixis Loomis Sayles Short Duration Income ETF (``Fund''). The 
proposed rule change was published for comment in the Federal Register 
on May 3, 2018.\4\ On June 5, 2018, the Commission extended the time 
period within which to approve the proposed rule change, disapprove the 
proposed rule change, or institute proceedings to determine whether to 
approve or disapprove the proposed rule change to August 1, 2018.\5\ On 
June 6, 2018, the Exchange filed Amendment No. 1 to the proposed rule 
change, which replaced and superseded the proposed rule change as 
originally filed. On July 27, 2018, the Commission noticed filing of 
Amendment No. 1 and instituted proceedings to determine whether to 
approve or disapprove the proposed rule change.\6\ On July 27, 2018, 
pursuant to Section 19(b)(2) of the Act,\7\ the Commission designated a 
longer period within which to issue an order approving or disapproving 
the proposed rule change.\8\ On December 6, 2018, the Exchange filed 
Amendment No. 2 to the proposed rule change, which replaced and 
superseded the proposed rule change as modified by Amendment No. 1.\9\ 
On October 22,

[[Page 65387]]

2018, the Commission extended the time period for Commission action to 
December 29, 2018.\10\ The Commission received no comments on the 
proposed rule change. This order approves the proposed rule change, as 
modified by Amendment No. 2.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
    \4\ See Securities Exchange Act Release No. 83122 (April 27, 
2018), 83 FR 19578.
    \5\ See Securities Exchange Act Release No. 83385, 83 FR 27034 
(June 11, 2018).
    \6\ See Securities Exchange Act Release No. 83733, 83 FR 37831 
(August 2, 2018).
    \7\ 15 U.S.C. 78s(b)(2).
    \8\ See Securities Exchange Act Release No. 84462, 83 FR 54153 
(October 26, 2018). The Commission designated December 29, 2018, as 
the date by which the Commission shall either approve or disapprove 
the proposed rule change.
    \9\ In Amendment No. 2, the Exchange: (1) Clarified the scope of 
asset-backed securities (``ABSs'') in which the Fund may invest; (2) 
limited the junior loans in which the Fund may invest to those that 
satisfy all of the criteria in Commentary .01(b) to Rule 8.600-E; 
(3) clarified the scope of mortgage-backed securities (``MBSs'') in 
which the Fund may invest; (4) eliminated as permitted investments 
of the Fund publicly or privately issued interests in investment 
pools whose underlying assets are credit default, credit-linked, 
interest rate, currency exchange, equity-linked or other types of 
swap contracts and related underlying securities or securities loan 
agreements; (5) established and provided support for the following 
diversification requirements with respect to the Fund's investments 
in non-agency ABS and MBS, which collectively may comprise up to 30% 
of the weight of the Fund's ``Fixed Income Securities'' (defined 
below): (a) Up to 25% of such weight may be in ABS, provided that up 
to 5% of the weight of its Fixed Income Securities investments may 
be in CBOs, CLOs and CDOs, in the aggregate; (b) up to 15% of its 
Fixed Income Securities investments may be in MBS, including CMOs 
but excluding CMBS; and (c) up to 15% of its Fixed Income Securities 
investments may be in CMBS; and (6) made other technical, non-
substantive, and conforming changes. Because Amendment No. 2 makes 
clarifying modifications, provides additional representations, and 
eliminates a permitted category of investments, it is not subject to 
notice and comment. All of the amendments to the proposed rule 
change are available at: https://www.sec.gov/comments/sr-nysearca-2018-25/nysearca201825.htm.
    \10\ See Securities Exchange Act Release No. 84462, 83 FR 54153 
(October 26, 2018).
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II. Description of the Proposal \11\
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    \11\ Additional information regarding the Fund, the Trust 
(defined infra), and the Shares can be found in Amendment No. 2, 
supra note 9, and the Registration Statement, infra note 13.
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    Pursuant to Commentary .01 to NYSE Arca Rule 8.600-E,\12\ the 
Exchange listed and began trading the Shares on December 28, 2017. The 
Shares are offered by Natixis ETF Trust (``Trust''), which is 
registered as an open-end management investment company under the 
Investment Company Act of 1940 (``1940 Act'').\13\ Natixis Advisors, 
L.P. (``Adviser'') is the investment adviser for the Fund. Loomis, 
Sayles & Company, L.P. is the Fund's sub-adviser (``Sub-Adviser''). The 
Fund's investment objective is current income consistent with 
preservation of capital. The Exchange filed this proposed rule change 
because the Fund would like to invest in assets that may not satisfy 
all of the requirements of Commentary .01 to NYSE Arca Rule 8.600-E, as 
discussed further below.
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    \12\ NYSE Arca Rule 8.600-E governs the listing and trading of 
Managed Fund Shares on the Exchange. A ``Managed Fund Share'' is a 
security that (1) represents an interest in a registered investment 
company (``Investment Company'') organized as an open-end management 
investment company or similar entity, that invests in a portfolio of 
securities selected by the Investment Company's investment adviser 
consistent with the Investment Company's investment objectives and 
policies; (2) is issued in a specified aggregate minimum number in 
return for a deposit of a specified portfolio of securities and/or a 
cash amount with a value equal to the next determined net asset 
value (``NAV''); and (3) when aggregated in the same specified 
minimum number, may be redeemed at a holder's request, which holder 
will be paid a specified portfolio of securities and/or cash with a 
value equal to the next determined NAV. See NYSE Arca Rule 8.600-
E(c)(1). Pursuant to Commentary .01 to NYSE Arca Rule 8.600-E, the 
Exchange may approve Managed Fund Shares for listing and trading 
pursuant to Rule 19b-4(e) under the Act provided that components the 
actively managed fund's portfolio comply with specified criteria 
upon initial listing and on a continual basis.
    \13\ On December 26, 2017, the Trust filed with the Commission 
its registration statement on Form N-1A under the Securities Act of 
1933 (15 U.S.C. 77a), and under the 1940 Act relating to the Fund 
(File Nos. 333-210156 and 811-23146) (``Registration Statement''). 
In addition, the Commission has issued an order granting certain 
exemptive relief to the Trust under the 1940 Act. See Investment 
Company Act Release No. 30654 (August 20, 2013) (File No. 812-13942-
02).
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A. The Fund's Contemplated Investments

    While the Fund may hold any portion of its assets in cash (U.S. 
dollars, foreign currencies or multinational currency units) and/or 
cash equivalents, under normal market conditions,\14\ the Fund will 
invest at least 80% of its net assets in the following:
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    \14\ The term ``normal market conditions'' is defined in NYSE 
Arca Rule 8.600-E(c)(5).
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     U.S. Government Securities, including U.S. Treasury Bills, 
U.S. Treasury Notes and Bonds, U.S. Treasury Floating Rate Notes, 
Treasury Inflation-Protected Securities, and obligations of U.S. 
agencies or instrumentalities (e.g., ``Ginnie Maes'', ``Fannie Maes'' 
and ``Freddie Macs'');
     agency and non-agency asset-backed securities (``ABS''); 
\15\
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    \15\ ABSs may include collateralized bond obligations 
(``CBOs''), collateralized loan obligations (``CLOs''), and other 
collateralized debt obligations (``CDOs'').
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     U.S. dollar-denominated foreign securities, including 
emerging market securities;
     Adjustable-Rate Mortgage Securities;
     junior and senior loans; \16\
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    \16\ The Fund's investment in junior loans is subject to all 
criteria in Commentary .01(b) to Rule 8.600-E, including the 
criteria relating to minimum original principal amount outstanding 
(Commentary .01(b)(1), portfolio weighting (Commentary .01(b)(2), 
and the numerical and other criteria in Commentary .01(b)(4). See 
Amendment No. 2, supra note 9, at 6, n.7.
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     bank loans, loan participations and assignments;
     agency and non-agency mortgage-backed securities 
(``MBS''); \17\
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    \17\ MBS may include collateralized mortgage obligations 
(``CMOs'') and commercial mortgage-backed securities (``CMBS'').
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     zero coupon and pay-in-kind securities;
     corporate bonds;
     Non-US government securities, supranational entities 
obligations issued by foreign governments, or international agencies 
and instrumentalities;
     inflation-linked and inflation-indexed securities;
     money market instruments; \18\
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    \18\ Money market instruments are short-term instruments 
referenced in Commentary .01(c) to NYSE Arca Rule 8.600-E.
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     mortgage-related securities (such as Government National 
Mortgage Association or Federal National Mortgage Association 
certificates);
     mortgage dollar rolls;
     variable and floating rate securities;
     Rule 144A securities;
     taxable municipal securities;
     step-coupon securities; and
     stripped securities (collectively, ``Fixed Income 
Securities'').
    Additionally, under normal market conditions,\19\ the Fund may 
invest its remaining assets in the following:
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    \19\ See supra note 14.
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     short sales of Fixed Income Securities;
     exchange-traded funds (``ETFs'') \20\ and exchange-traded 
notes (``ETNs''); \21\
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    \20\ All ETFs will be listed and traded in the U.S. on a 
national securities exchange. While the Fund may invest in inverse 
ETFs, the Fund will not invest in leveraged (e.g., 2X, -2X, 3X or -
3X) ETFs. See Amendment No. 2, supra note 9, at 7, n.11.
    \21\ ETNs are Index-Linked Securities as described in NYSE Arca 
Rule 5.2-E(j)(6). See id. at 7, n.12.
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     the following swaps: Interest rate, credit default, credit 
default swaps index (``CDX''), commodity, equity-linked, fixed income, 
credit default, credit-linked and currency exchange swaps or an index 
or indexes of the foregoing;
     swaptions;
     the following options: U.S. exchange-traded and over-the-
counter (``OTC'') options on Fixed Income Securities, domestic and 
foreign equity and fixed income indices, CDX, U.S. Treasury futures 
contracts, interest rates and currencies;
     futures on Fixed Income Securities, domestic and foreign 
equity and fixed income indices, interest rates and CDX; and
     shares of non-exchange-traded open-end investment company 
securities.

B. The Contemplated Investments' Possible Non-Compliance With the 
Generic Listing Requirements

    The Exchange filed this proposed rule change to allow the Fund's 
portfolio to not satisfy the two ``generic'' listing criteria of 
Commentary .01 to NYSE Arca Rule 8.600-E going forward.
    First, as noted above, the Fund desires to invest in non-exchange 
traded investment company securities (e.g., mutual fund shares). Such 
shares, which could comprise at most up to 20% of the Fund's net 
assets, would not satisfy the requirements of Commentary .01(a)(1) to 
Rule 8.600-E.\22\ According to

[[Page 65388]]

the Exchange, the Fund would utilize such investments to help the Fund 
meet its investment objective and to equitize cash in the short 
term.\23\
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    \22\ Commentary .01(a)(1) to Rule 8.600-E requires that the 
component stocks of the equity portion of a portfolio that are U.S. 
Component Stocks shall meet certain criteria initially and on a 
continuing basis. Specifically: Commentary .01(a)(1)(A) requires 
that component stocks (excluding Derivative Securities Products and 
Index-Linked Securities) that in the aggregate account for at least 
90% of the equity weight of the portfolio (excluding such Derivative 
Securities Products and Index-Linked Securities) each shall have a 
minimum market value of at least $75 million; Commentary 
.01(a)(1)(B) requires that component stocks (excluding Derivative 
Securities Products and Index-Linked Securities) that in the 
aggregate account for at least 70% of the equity weight of the 
portfolio (excluding such Derivative Securities Products and Index-
Linked Securities) each shall have a minimum monthly trading volume 
of 250,000 shares, or minimum notional volume traded per month of 
$25,000,000, averaged over the last six months; Commentary 
.01(a)(1)(C) requires that the most heavily weighted component stock 
(excluding Derivative Securities Products and Index-Linked 
Securities) shall not exceed 30% of the equity weight of the 
portfolio, and, to the extent applicable, the five most heavily 
weighted component stocks (excluding Derivative Securities Products 
and Index-Linked Securities) shall not exceed 65% of the equity 
weight of the portfolio; Commentary .01(a)(1)(D) requires that, 
where the equity portion of the portfolio does not include Non-U.S. 
Component Stocks, the equity portion of the portfolio shall include 
a minimum of 13 component stocks, provided that there shall be no 
minimum number of component stocks if (i) one or more series of 
Derivative Securities Products or Index-Linked Securities 
constitute, at least in part, components underlying a series of 
Managed Fund Shares, or (ii) one or more series of Derivative 
Securities Products or Index-Linked Securities account for 100% of 
the equity weight of the portfolio of a series of Managed Fund 
Shares; and Commentary .01(a)(1)(E) requires that, except as 
provided herein, equity securities in the portfolio shall be U.S. 
Component Stocks listed on a national securities exchange and shall 
be NMS Stocks as defined in Rule 600 of Regulation NMS under the 
Securities Exchange Act of 1934.
    \23\ See id.
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    Second, the Fund seeks to modify the limit on non-agency, non-
government-sponsored entity (``GSE'') and privately-issued mortgage-
related and other asset-backed securities. Instead, of the 20% limit in 
Commentary .01(b)(5),\24\ the Exchange proposes that up to 30% of the 
weight of the Fixed Income Securities portion of the Fund's portfolio 
consist of non-agency, non-GSE and privately-issued mortgage-related 
and other asset-backed securities, provided that: (1) Up to 25% of such 
weight may be in ABS, provided that up to 5% of the weight of its Fixed 
Income Securities investments may be in CBOs, CLOs and CDOs, in the 
aggregate; (2) up to 15% of its Fixed Income Securities investments may 
be in MBS, including CMOs but excluding CMBS; and (3) up to 15% of its 
Fixed Income Securities investments may be in CMBS. The Exchange 
asserts that these limits would provide additional diversification to 
the Fund's ABS and MBS investments and reduce concerns that the Fund's 
investment in such securities would be readily susceptible to market 
manipulation. According to the Adviser, permitting such investments: 
(1) Would be in the best interest of the Fund's shareholders because 
such investments have the potential to reduce the overall risk profile 
of the Fund's portfolio through diversification; and (2) would afford 
the Fund greater flexibility to invest in the most liquid available 
Fixed Income Securities issues.\25\
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    \24\ Commentary .01(b)(5) to Rule 8.600-E prohibits non-agency, 
non-GSE and privately-issued mortgage-related and other asset-backed 
securities components of a portfolio from accounting (in the 
aggregate) for more than 20% of the weight of the fixed income 
portion of the portfolio.
    \25\ See id.
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    The Exchange would require the Shares to satisfy all the other 
requirements of Rule 8.600-E.\26\
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    \26\ See id. at 15.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the Exchange's 
proposal to amend the listing requirements applicable to the Shares is 
consistent with the Act and the rules and regulations thereunder 
applicable to a national securities exchange.\27\ In particular, the 
Commission finds that the proposed rule change, as modified by 
Amendment No. 2, is consistent with Section 6(b)(5) of the Act,\28\ 
which requires, among other things, that the Exchange's rules be 
designed to prevent fraudulent and manipulative acts and practices, 
promote just and equitable principles of trade, 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.
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    \27\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \28\ 15 U.S.C. 78f(b)(5).
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    As mentioned above, the Shares would continue to satisfy all of the 
generic listing criteria except for the requirements of Commentary 
.01(b)(5) to NYSE Arca Rule 8.600-E,\29\ and Commentary .01(a)(1)(A) 
through (E) to Rule 8.600-E.
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    \29\ Commentary .01(b)(5) to NYSE Arca Rule 8.600-E provides 
that non-agency, non-government sponsored entity and privately 
issued mortgage-related and other asset-backed securities components 
of a portfolio may not account, in the aggregate, for more than 20% 
of the weight of the fixed income portion of the portfolio.
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    The Commission believes that permitting the Fund to invest up to 
20% of its net assets in non-exchange traded investment company 
securities would not render the Shares susceptible to manipulation. The 
Commission has previously approved listing rules for other series of 
Managed Fund Shares that permit investments in such securities.\30\
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    \30\ See, e.g., Securities Exchange Act Release No. 78414 (July 
26, 2016), 81 FR 50576 (August 1, 2016) (SR-NYSEArca-2016-79) 
(approving the listing and trading of shares of the Virtus Japan 
Alpha ETF under NYSE Arca Equities Rule 8.600).
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    With respect to the proposed 30% limit on non-agency, non-GSE and 
privately-issued mortgage-related and other asset-backed securities, 
the Commission believes that the proposed sub-limits described above, 
are sufficient to diversify the Fund's portfolio of such securities and 
mitigate manipulation concerns. The Commission notes that it recently 
approved a similar limit for an issue of Managed Fund Shares permitted 
to invest in fixed income securities.\31\
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    \31\ See Securities Exchange Act Release No. 84047 (September 6, 
2018), 83 FR 46200 (September 12, 2018) (SR-Nasdaq-2017-128) 
(approving the listing and trading of shares of the Western Asset 
Total Return ETF).
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    In support of this proposal, the Exchange has also made the 
following representations:
    (1) The Fund will only purchase U.S. dollar denominated non-agency 
ABS and MBS that are settled through DTC.\32\
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    \32\ See Amendment No. 2, supra note 9, at 12.
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    (2) All statements and representations made in this filing 
regarding (a) the description of the portfolio, (b) limitations on 
portfolio holdings or reference assets, or (c) the applicability of 
Exchange listing rules specified in this rule filing shall constitute 
continued listing requirements for listing the Shares on the 
Exchange.\33\
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    \33\ See id. at 19.
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    (3) The issuer will advise the Exchange of any failure by the Fund 
to comply with the continued listing requirements, and, pursuant to its 
obligations under Section 19(g)(1) of the Act, the Exchange will 
monitor for compliance with the continued listing requirements. If the 
Fund is not in compliance with the applicable listing requirements, the 
Exchange will commence delisting procedures under NYSE Arca Rule 
5.5(m)-E.\34\
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    \34\ See id.
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    (4) The Exchange has appropriate rules to facilitate transactions 
in the Shares during all trading sessions.\35\
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    \35\ See id. at 17.
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    (5) The Exchange has in place surveillance procedures that are 
adequate to properly monitor trading in the Shares in all trading 
sessions and to deter and detect violations of Exchange rules and 
federal securities laws applicable to trading on the Exchange.\36\
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    \36\ See id. at 18.
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    (6) For continued listing, the Fund will be in compliance with Rule 
10A-3 under the Act, as provided by NYSE Arca Rule 5.3-E.\37\
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    \37\ See id. at 18. See also 17 CFR 240.10A-3.
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This approval order is based on all of the Exchange's representations, 
including those set forth above and in the Amendment No. 2.
    For the foregoing reasons, the Commission finds that the proposed

[[Page 65389]]

rule change, as modified by Amendment No. 2, is consistent with Section 
6(b)(5) of the Act \38\ and the rules and regulations thereunder 
applicable to a national securities exchange.
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    \38\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\39\ that the proposed rule change (SR-NYSEArca-2018-25), as 
modified by Amendment No. 2, be, and it hereby is, approved.
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    \39\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\40\
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    \40\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2018-27509 Filed 12-19-18; 8:45 am]
 BILLING CODE 8011-01-P