Self-Regulatory Organizations; ICE Clear Credit LLC; Order Approving Proposed Rule Change Relating to ICC's Treasury Operations Policies and Procedures, 50124-50127 [2018-21585]
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50124
Federal Register / Vol. 83, No. 193 / Thursday, October 4, 2018 / Notices
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SUMMARY:
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For the Nuclear Regulatory Commission.
Andrea Kock,
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Decommissioning, Uranium Recovery, and
Waste Programs, Office of Nuclear Material
Safety and Safeguards.
[FR Doc. 2018–21583 Filed 10–3–18; 8:45 am]
BILLING CODE 7590–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–84312; File No. SR–ICC–
2018–009]
Self-Regulatory Organizations; ICE
Clear Credit LLC; Order Approving
Proposed Rule Change Relating to
ICC’s Treasury Operations Policies
and Procedures
(SR–ICC–2018–009) to revise the ICC
Treasury Operations Policies and
Procedures (‘‘Treasury Policy’’).3 The
proposed rule change was published in
the Federal Register on August 16,
2018.4 The Commission did not receive
comments on the proposed rule change.
For the reasons discussed below, the
Commission is approving the proposed
rule change.
II. Description of the Proposed Rule
Change
The proposed rule change would
amend the Treasury Policy. In
accordance with CFTC Regulation 1.25,5
the Treasury Policy currently prohibits
ICC from investing both Eurodenominated and U.S. Dollardenominated cash posted by Clearing
Participants (‘‘CPs’’) for their margin
requirements related to client positions
(‘‘Customer Origin Cash’’) in foreign
sovereign debt. ICC may hold U.S.
Dollar-denominated cash in its account
at the Federal Reserve Bank of Chicago.
ICC’s default position is to hold U.S.
Dollar-denominated cash, including
both Customer Origin Cash and cash
posted by CPs for their Guaranty Fund
(‘‘GF’’) and margin requirements related
to their own positions (‘‘House Origin
Cash’’) in its Federal Reserve account.
ICC cannot hold Euro-denominated
Cash in its Federal Reserve account,
however, and therefore holds such cash
elsewhere. Specifically, Eurodenominated House Cash is either
invested in certain sovereign debt
(currently, German, French, Dutch, or
Finnish debt) pursuant to ICC’s current
Euro Investment Guidelines or at
commercial banks in unsecured demand
deposit accounts subject to the credit
risk of the commercial bank. Until
recently, CFTC Regulation 1.25
prohibited Euro-denominated Customer
Cash from being invested in foreign
sovereign debt, and so was held
exclusively at commercial banks in
unsecured demand deposit accounts.
However, the Commodities Futures
Trading Commission (‘‘CFTC’’) recently
issued an exemptive order 6 (the ‘‘CFTC
Order’’) permitting ICC to invest, subject
to certain conditions, Euro-denominated
September 28, 2018.
I. Introduction
On July 31, 2018, ICE Clear Credit
LLC (‘‘ICC’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’),1 and Rule 19b–4
thereunder,2 a proposed rule change
1 15
2 17
PO 00000
U.S.C. 78s(b)(1).
CFR 240.19b–4.
Frm 00062
Fmt 4703
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3 Capitalized terms used herein but not otherwise
defined have the meaning set forth in the ICC Rules
or the Treasury Policy. Available at https://
www.theice.com/publicdocs/clear_credit/ICE_
Clear_Credit_Rules.pdf.
4 Securities Exchange Act Release No. 34–83819
(August 10, 2018), 83 FR 40813 (August 16, 2018)
(SR–ICC–2018–009) (‘‘Notice’’).
5 17 CFR 1.25.
6 Order Granting Exemption From Certain
Provisions of the Commodity Exchange Act
Regarding Investment of Customer Funds and From
Certain Related Commission Regulations, 83 FR
35241 (July 25, 2018) (‘‘CFTC Order’’).
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Federal Register / Vol. 83, No. 193 / Thursday, October 4, 2018 / Notices
Customer Origin Cash in French and
German sovereign debt.7
Accordingly, the proposed rule
change would update the Treasury
Policy in light of the CFTC Order.
Specifically, as described in more detail
below, the proposed rule change would,
among other things, amend the Treasury
Policy to permit ICC to invest Eurodenominated Customer Cash in certain
foreign sovereign debt.
daltland on DSKBBV9HB2PROD with NOTICES
A. Changes Relating to Customer Origin
Cash and House Origin Cash
To implement the change described
above in response to the CFTC Order,
the proposed rule change would (1)
allow ICC to invest Customer Origin
Cash in accordance with the Treasury
Policy’s guidelines for investing House
Origin Cash; (2) revise those investment
guidelines to provide for the investment
of Euro-denominated Customer Origin
Cash in French and German sovereign
debt in accordance with the
requirements of CFTC Regulation 1.25 8
and the CFTC Order; (3) separate the
‘ICC Investment of Guaranty Fund and
Margin Cash’ subsection into USD and
Euro headings and make additional
edits under those headings; and (4)
amend provisions regarding ICC’s use of
its Federal Reserve Account.
First, the proposed rule change would
allow ICC to invest Customer Origin
Cash in the same manner as House
Origin Cash in accordance with the
Treasury Policy’s investment guidelines
(proposed changes to treatment of
House Origin Cash are described below)
by adding a new ‘Investment of Client
Margin Cash’ subsection within the
‘Treasury Management for Client
Business’ section, which would state
that ICC will invest Customer Origin
Cash in accordance with Sections III.B.2
and III.B.3 of the Treasury Policy, which
describe how ICC invests House Origin
Cash.9 The proposed rule change would
specify that any such investment will be
executed in compliance with CFTC
Regulation 1.25 10 and any applicable
exemptive orders, including, without
limitation, the conditions in CFTC
Regulation 1.25 11 related to the
investment of Customer Origin Cash in
non-U.S. sovereign debt.12
Second, the proposed rule change
would revise the Treasury Policy’s Euro
investment guidelines to allow ICC, or
an Investment Manager acting on its
behalf, to invest Euro-denominated
7 Notice,
83 FR at 40814.
CFR 1.25.
9 Notice, 83 FR at 40814.
10 17 CFR 1.25.
11 Id.
12 Notice, 83 FR at 40814.
8 17
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Customer Origin Cash.13 Currently, the
Euro investment guidelines only
provide for the investment of Eurodenominated House Origin Cash. In
light of the fact that the CFTC Order
would permit ICC to now invest Eurodenominated Customer Origin Cash in
French and German sovereign debt, the
proposed rule change would apply the
Euro investment guidelines to Customer
Origin Cash to allow for such
investment.14
In accordance with the CFTC Order,15
the proposed rule change would amend
the Euro investment guidelines to limit
permissible investment, directly and
through reverse repurchase agreements
(‘‘reverse repo’’), to French and German
sovereign debt.16 If 100% of the
allocated cash cannot be placed in
overnight reverse repo, the investment
guidelines would provide for backup
investments in term reverse repo 17 and
then direct investment in the sovereign
debt.18 The proposed rule change would
apply these changes to both Eurodenominated Customer Origin Cash and
Euro-denominated House Origin Cash.
Previously the Euro investment
guidelines permitted investment of
Euro-denominated House Origin Cash in
Dutch and Finnish sovereign debt, in
addition to French and German. To be
consistent with ICC’s treatment of
Customer Origin Cash, the proposed
rule change would also limit investment
of House Origin Cash to French and
German sovereign debt.
With respect to Euro-denominated
Customer Origin Cash only, however,
the proposed rule change would require
that investments comply with any
applicable conditions or restrictions set
forth in CFTC Regulation 1.25 19
including any applicable exemptive
orders.20 The proposed rule change
would also provide that should
conditions change so that the French or
German sovereign debt no longer meets
the conditions or restrictions of CFTC
Regulation 1.25,21 the outside
investment manager shall discontinue
making any additional investments in
such sovereign debt issuers.22 These
limitations would be necessary to
comply with the terms of the CFTC
13 Id.
14 CFTC
Order, 83 FR at 35244–35245.
15 Id.
16 Notice,
83 FR at 40814.
respect to Customer Origin Cash, an
investment in term reverse repo would only be
permissible if the Client has the right of optional
early termination upon demand.
18 Notice, 83 FR at 40814.
19 17 CFR 1.25.
20 Notice, 83 FR at 40814.
21 17 CFR 1.25.
22 Notice, 83 FR at 40814.
17 With
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50125
Order.23 Because the CFTC Order only
applies to Customer Origin Cash, it is
not necessary to apply these changes to
House Origin Cash.24
Third, in response to the exemptive
relief permitting ICC to invest Eurodenominated customer funds in French
and German sovereign debt, the
proposed rule change would separate
the ‘ICC Investment of Guaranty Fund
and Margin Cash’ subsection into USD
and Euro headings. The proposed rule
change would add a proposed ‘Euro’
heading, which would permit ICC’s
Treasury Department to directly invest
Euro-denominated Customer Origin
Cash and House Origin Cash. Under the
proposed rule change, Eurodenominated House Origin Cash and
Customer Origin Cash would be (1) held
in bank deposits, (2) allocated to outside
investment managers, or (3) directly
held/invested by the ICC Treasury
Department.25 Under scenarios (2) and
(3), the investment managers or the ICC
Treasury Department, as applicable,
would invest the Euro-denominated
House Origin Cash and Eurodenominated Customer Origin Cash
pursuant to the Euro investment
guidelines (changes to which are
described above).
Fourth, the proposed rule change
would also move the reference to ICC’s
default position of holding U.S. Dollardenominated Customer Origin Cash and
House Origin Cash in its Federal
Reserve Account from the ‘Investment
Strategy’ subsection to the amended
‘ICC Investment of Guaranty Fund and
Margin Cash’ subsection under the
proposed USD heading.26 This change
would allow ICC to consolidate, under
the proposed USD heading, all of the
provisions relating to ICC’s use of the
Federal Reserve Account for holding
U.S. Dollar-denominated Customer
Origin Cash and House Origin Cash. As
described above, the proposed rule
change would also apply this ‘ICC
Investment of Guaranty Fund and
Margin Cash’ subsection to Customer
Origin Cash.
Further in the proposed ‘USD’
heading, ICC would note that if it is
unable to deposit U.S. Dollardenominated Customer Origin Cash and
House Origin Cash in its Federal
Reserve Account, ICC’s Treasury
Department would be able to hold or
invest such cash as specified within the
Treasury Policy.27 The proposed rule
23 CFTC
Order, 83 FR at 35244–35245.
24 Id.
25 Notice,
26 Notice,
83 FR at 40814.
83 FR at 40814.
27 Id.
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Federal Register / Vol. 83, No. 193 / Thursday, October 4, 2018 / Notices
change would also correct a
typographical error by adding the verb
‘‘has’’ to the phrase ‘‘ICE Clear Credit
arrangements.’’ 28
B. Changes Relating to Outside
Investment Managements and Clean-Up
Changes
To reflect ICC’s engagement of
multiple outside investment managers
the proposed rule change would remove
reference to a specific outside
investment manager in the ‘Outside
Investment Management of Guaranty
Fund and Margin Cash’ subsection.29
The proposed rule change would also
correct certain typographical errors in
this section to improve readability,
including removing the indefinite
article ‘‘an’’ in the phrase ‘‘an
alternative or additional outside
investment managers’’, adding the
definite article ‘‘the’’ to the phrase
‘‘Investment Manager’s investment’’,
and changing ‘‘Directory of Treasury’’ to
‘‘Director of Treasury’’ in a footnote.30
The proposed rule change would also
remove language from the ‘Treasury
Management for Client Business’ section
that references the introduction of client
trades to clarify that ICC has already
commenced client clearing.31
III. Discussion and Commission
Findings
Section 19(b)(2)(C) of the Act directs
the Commission to approve a proposed
rule change of a self-regulatory
organization if it finds that such
proposed rule change is consistent with
the requirements of the Act and the
rules and regulations thereunder
applicable to such organization.32 For
the reasons given below, the
Commission finds that the proposal is
consistent with Section 17A(b)(3)(F) of
the Act 33 and Rules 17Ad–22(b)(2),
17Ad–22(b)(3), and 17Ad–22(d)(3)
thereunder.34
A. Consistency With Section
17A(b)(3)(F) of the Act
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Section 17A(b)(3)(F) of the Act
requires, among other things, that the
rules of ICC be designed to assure the
safeguarding of securities and funds
which are in the custody or control of
ICC or for which it is responsible, and,
in general, to protect investors and the
public interest.35
28 Id.
29 Id.
30 Notice,
83 FR at 40814.
31 Id.
32 15
U.S.C. 78s(b)(2)(C).
U.S.C. 78q–1(b)(3)(F).
34 17 CFR 240.17Ad–22(b)(2), (b)(3), and (d)(3).
35 15 U.S.C. 78q–1(b)(3)(F).
33 15
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As discussed above, the proposed rule
change would update the Treasury
Policy in light of the CFTC Order
permitting ICC to invest, subject to
certain conditions, Euro-denominated
Customer Origin Cash in French and
German sovereign debt. Currently, ICC
cannot hold Euro-denominated cash in
its Federal Reserve account. Therefore
ICC invests Euro-denominated House
Origin Cash in certain foreign sovereign
debt, but holds Euro-denominated
Customer Cash at commercial banks in
unsecured demand deposit accounts. By
providing ICC an alternative to holding
Euro-denominated Customer Origin
Cash at commercial banks, where such
cash is subject to the credit risk of the
commercial bank, the proposed rule
change would help ICC ensure the
reliable investment of assets in ICC’s
control while at the same time avoiding
subjecting such cash to the credit risk of
the commercial bank, thereby providing
ICC with an important alternative for
the protection and safeguarding of
Customer Origin Cash and House Origin
Cash. And permitting ICC to use
multiple outside investment managers
to invest Euro-denominated Customer
Origin and House Origin Cash on behalf
of ICC would further help facilitate the
safeguarding of such cash by allowing
ICC to employ as many managers as it
may need to make its investments and
remove investment managers who
underperform, which would facilitate
ICC’s ability to invest such cash in
accordance with the Treasury Policy.
The Commission believes that, when
compared to credit risk at commercial
banks, French and German sovereign
debt is a reasonably safe investment,
and therefore investment by ICC in such
debt provides a safe alternative to
deposit in commercial banks and would
help assure the safeguarding of Eurodenominated House Origin Cash and
Customer Origin Cash.
We note that, although permitting ICC
to invest Customer Origin Cash through
a reverse repo still exposes ICC to the
credit risk of the counterparty to the
reverse repo transaction, unlike placing
the cash in an unsecured demand
deposit account at a commercial bank,
ICC would receive German and French
Sovereign Debt as collateral against the
repo counterparty’s credit risk, thereby
helping to mitigate the risk. Similarly, to
the extent a custodian holding the
collateral in connection with a reverse
repo transaction entered insolvency
proceedings, ICC would have a claim to
specific securities rather than a general
claim against the assets of the custodian,
as it would have with respect to cash on
deposit at a commercial bank account,
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which could put ICC in a better position
to recover losses in case of insolvency
proceedings. For these reasons, the
Commission believes that ICC’s
investment of Euro-denominated
Customer Origin Cash and House Origin
Cash in French and German sovereign
debt, under the conditions of the
proposed rule change, would help ICC
ensure the reliable investment of assets
in ICC’s control while at the same time
helping to assure the safeguarding of
such cash by reducing the exposure to
counterparty credit risk from
commercial banks.
By helping to assure the safeguarding
of Customer Origin Cash and House
Origin Cash, which CPs post to satisfy
their clients’ margin requirements and
their own margin and GF requirements,
the Commission also believes the
proposed changes could help reduce
risks to ICC’s margin system and
Guaranty Fund, which in turn could
help ensure that ICC is able to continue
providing its critical central
counterparty services in the event of a
CP default. By ensuring that the assets
that comprise the margin and Guaranty
Fund collected by ICC, in the form of
Customer Origin Cash and House Origin
Cash, are safely invested and held in a
manner that will allow ICC to access
such assets when needed, the
Commission believes that the propose
rule change would help improve the
overall effectiveness of ICC’s margin
system and Guaranty Fund as risk
management tools. For the same
reasons, the Commission believes the
proposed rule change would, in general,
help protect investors and the public
interest.
Therefore, the Commission finds that
the proposed rule change would assure
the safeguarding of securities and funds
in ICC’s custody and control, and, in
general, protect investors and the public
interest, consistent with the Section
17A(b)(3)(F) of the Act.36
B. Consistency With Rules 17Ad–
22(b)(2) and 17Ad–22(b)(3)
Rule 17Ad–22(b)(2) requires that ICC
establish, implement, maintain and
enforce written policies and procedures
reasonably designed to use margin
requirements to limit its credit
exposures to participants under normal
market conditions and use risk-based
models and parameters to set margin
requirements and review such margin
requirements and the related risk-based
models and parameters at least
monthly.37 Rule 17Ad–22(b)(3) requires
that ICC establish, implement, maintain
36 15
37 17
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U.S.C. 78q–1(b)(3)(F).
CFR 240.17Ad–22(b)(2).
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and enforce written policies and
procedures reasonably designed to
maintain sufficient financial resources
to withstand, at a minimum, a default
by the two participant families to which
it has the largest exposures in extreme
but plausible market conditions.38
As discussed above, the Commission
believes that the proposed changes
facilitating the investment of Eurodenominated Customer Origin Cash and
House Origin Cash in French and
German sovereign debt would improve
the safeguarding of such cash, and
would thereby help reduce risks to ICC’s
margin system and GF. As described
above, the proposed rule change would
provide ICC two reasonably safe
investments for such cash—French and
German sovereign debt—which ICC
could use to maintain and preserve the
cash in ICC’s margin system and GF,
which in turn could help ICC to
maintain margin requirements to limit
its credit exposures to participants
under normal market conditions.
Likewise, by improving the safeguarding
and investment of the cash in the GF,
which ICC collects from CPs to maintain
such sufficient financial resources, the
Commission believes the proposed rule
change would help ICC to maintain
sufficient financial resources to
withstand, at a minimum, a default by
the two participant families to which it
has the largest exposures in extreme but
plausible market conditions.
Therefore, for these reasons, the
Commission finds that the proposed
rule change is consistent with Rules
17Ad–22(b)(2) and 17Ad–22(b)(3).39
C. Consistency With Rule 17Ad–22(d)(3)
Rule 17Ad–22(d)(3) requires that ICC
establish, implement, maintain and
enforce written policies and procedures
reasonably designed to hold assets in a
manner that minimizes risk of loss or of
delay in its access to them and invest
assets in instruments with minimal
credit, market and liquidity risk.40
As described above, the proposed rule
change would allow the investment of
Euro-denominated Customer Origin
Cash and House Origin Cash in French
and German sovereign debt, allowing
ICC to avoid holding such cash in
demand deposits at commercial banks.
Moreover, the proposed rule change
would prohibit investment in French
and German sovereign debt when such
investment would not comply with the
conditions and restrictions set forth in
CFTC Regulation 1.25,41 the CFTC
38 17
CFR 240.17Ad–22(b)(3).
CFR 240.17Ad–22(b)(2), (b)(3).
40 17 CFR 240.17Ad–22(d)(3).
41 17 CFR 1.25.
39 17
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17:43 Oct 03, 2018
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Order, and any other applicable
exemptive orders. Such conditions and
restrictions would, among other things,
prohibit investment if the two year
credit default spread of France or
Germany exceeds 45 basis points (which
the CFTC considered to approximate the
risk level of the United States).42
Finally, the Treasury Policy’s Euro
investment guidelines would set a target
of 100% of investment through
overnight reverse repos, meaning a
reverse repo transaction for which the
agreed upon repurchase date is the
business day immediately following the
purchase date.
For all the reasons discussed above,
the Commission believes that in
facilitating investment in French and
German sovereign debt with minimal
credit risk and creating risk controls
surrounding such investments, the
proposed rule change would allow ICC
to hold Customer Origin Cash and
House Origin Cash in a manner that
minimizes risk of loss or of delay in
ICC’s access to them and would allow
ICC to invest such funds in instruments
with minimal credit, market and
liquidity risk.
Therefore, for these reasons, the
Commission finds that the proposed
rule change is consistent with Rule
17Ad–22(d)(3).43
IV. Conclusion
On the basis of the foregoing, the
Commission finds that the proposal is
consistent with the requirements of the
Act, and in particular, with the
requirements of Section 17A(b)(3)(F) of
the Act 44 and Rules 17Ad–22(b)(2),
17Ad–22(b)(3), and 17Ad–22(d)(3)
thereunder.45
It is therefore ordered pursuant to
Section 19(b)(2) of the Act 46 that the
proposed rule change (SR–ICC–2018–
009) be, and hereby is, approved.47
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.48
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–21585 Filed 10–3–18; 8:45 am]
BILLING CODE 8011–01–P
42 CFTC
Order, 83 FR at 35243–35245.
CFR 240.17Ad–22(d)(3).
44 15 U.S.C. 78q–1(b)(3)(F).
45 17 CFR 240.17Ad–22(b)(2), (b)(3), and (d)(3).
46 15 U.S.C. 78s(b)(2).
47 In approving the proposed rule change, the
Commission considered the proposal’s impact on
efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
48 17 CFR 200.30–3(a)(12).
43 17
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50127
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–84317; File No. SR–
NASDAQ–2018–075]
Self-Regulatory Organizations; The
Nasdaq Stock Market LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change To Amend
Rules 7039, 7047, 7049, 7055, and 7061
To Update the Definition of the Term
FINRA/Nasdaq Trade Reporting Facility
September 28, 2018.
Pursuant to 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
September 19, 2018, The Nasdaq Stock
Market LLC (‘‘Nasdaq’’ or ‘‘Exchange’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’) the
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.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
Rules 3 7039, 7047, 7049, 7055, and
7061 to update the definition of the term
‘‘FINRA/Nasdaq Trade Reporting
Facility (‘TRF’)’’ for Nasdaq Basic,
Nasdaq Last Sale (‘‘NLS’’), Nasdaq
InterACT, the Short Sale Monitor and
the Limit Locator to reflect approval of
a second FINRA/Nasdaq TRF in
Chicago, as described in further detail
below.
The text of the proposed rule change
is available on the Exchange’s website at
https://nasdaq.cchwallstreet.com, at the
principal office of the Exchange, and at
the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
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
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 References to rules are to Nasdaq rules, unless
otherwise noted.
2 17
E:\FR\FM\04OCN1.SGM
04OCN1
Agencies
[Federal Register Volume 83, Number 193 (Thursday, October 4, 2018)]
[Notices]
[Pages 50124-50127]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-21585]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-84312; File No. SR-ICC-2018-009]
Self-Regulatory Organizations; ICE Clear Credit LLC; Order
Approving Proposed Rule Change Relating to ICC's Treasury Operations
Policies and Procedures
September 28, 2018.
I. Introduction
On July 31, 2018, ICE Clear Credit LLC (``ICC'') filed with the
Securities and Exchange Commission (``Commission''), pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\
and Rule 19b-4 thereunder,\2\ a proposed rule change (SR-ICC-2018-009)
to revise the ICC Treasury Operations Policies and Procedures
(``Treasury Policy'').\3\ The proposed rule change was published in the
Federal Register on August 16, 2018.\4\ The Commission did not receive
comments on the proposed rule change. For the reasons discussed below,
the Commission is approving the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Capitalized terms used herein but not otherwise defined have
the meaning set forth in the ICC Rules or the Treasury Policy.
Available at https://www.theice.com/publicdocs/clear_credit/ICE_Clear_Credit_Rules.pdf.
\4\ Securities Exchange Act Release No. 34-83819 (August 10,
2018), 83 FR 40813 (August 16, 2018) (SR-ICC-2018-009) (``Notice'').
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II. Description of the Proposed Rule Change
The proposed rule change would amend the Treasury Policy. In
accordance with CFTC Regulation 1.25,\5\ the Treasury Policy currently
prohibits ICC from investing both Euro-denominated and U.S. Dollar-
denominated cash posted by Clearing Participants (``CPs'') for their
margin requirements related to client positions (``Customer Origin
Cash'') in foreign sovereign debt. ICC may hold U.S. Dollar-denominated
cash in its account at the Federal Reserve Bank of Chicago. ICC's
default position is to hold U.S. Dollar-denominated cash, including
both Customer Origin Cash and cash posted by CPs for their Guaranty
Fund (``GF'') and margin requirements related to their own positions
(``House Origin Cash'') in its Federal Reserve account. ICC cannot hold
Euro-denominated Cash in its Federal Reserve account, however, and
therefore holds such cash elsewhere. Specifically, Euro-denominated
House Cash is either invested in certain sovereign debt (currently,
German, French, Dutch, or Finnish debt) pursuant to ICC's current Euro
Investment Guidelines or at commercial banks in unsecured demand
deposit accounts subject to the credit risk of the commercial bank.
Until recently, CFTC Regulation 1.25 prohibited Euro-denominated
Customer Cash from being invested in foreign sovereign debt, and so was
held exclusively at commercial banks in unsecured demand deposit
accounts. However, the Commodities Futures Trading Commission
(``CFTC'') recently issued an exemptive order \6\ (the ``CFTC Order'')
permitting ICC to invest, subject to certain conditions, Euro-
denominated
[[Page 50125]]
Customer Origin Cash in French and German sovereign debt.\7\
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\5\ 17 CFR 1.25.
\6\ Order Granting Exemption From Certain Provisions of the
Commodity Exchange Act Regarding Investment of Customer Funds and
From Certain Related Commission Regulations, 83 FR 35241 (July 25,
2018) (``CFTC Order'').
\7\ Notice, 83 FR at 40814.
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Accordingly, the proposed rule change would update the Treasury
Policy in light of the CFTC Order. Specifically, as described in more
detail below, the proposed rule change would, among other things, amend
the Treasury Policy to permit ICC to invest Euro-denominated Customer
Cash in certain foreign sovereign debt.
A. Changes Relating to Customer Origin Cash and House Origin Cash
To implement the change described above in response to the CFTC
Order, the proposed rule change would (1) allow ICC to invest Customer
Origin Cash in accordance with the Treasury Policy's guidelines for
investing House Origin Cash; (2) revise those investment guidelines to
provide for the investment of Euro-denominated Customer Origin Cash in
French and German sovereign debt in accordance with the requirements of
CFTC Regulation 1.25 \8\ and the CFTC Order; (3) separate the `ICC
Investment of Guaranty Fund and Margin Cash' subsection into USD and
Euro headings and make additional edits under those headings; and (4)
amend provisions regarding ICC's use of its Federal Reserve Account.
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\8\ 17 CFR 1.25.
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First, the proposed rule change would allow ICC to invest Customer
Origin Cash in the same manner as House Origin Cash in accordance with
the Treasury Policy's investment guidelines (proposed changes to
treatment of House Origin Cash are described below) by adding a new
`Investment of Client Margin Cash' subsection within the `Treasury
Management for Client Business' section, which would state that ICC
will invest Customer Origin Cash in accordance with Sections III.B.2
and III.B.3 of the Treasury Policy, which describe how ICC invests
House Origin Cash.\9\ The proposed rule change would specify that any
such investment will be executed in compliance with CFTC Regulation
1.25 \10\ and any applicable exemptive orders, including, without
limitation, the conditions in CFTC Regulation 1.25 \11\ related to the
investment of Customer Origin Cash in non-U.S. sovereign debt.\12\
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\9\ Notice, 83 FR at 40814.
\10\ 17 CFR 1.25.
\11\ Id.
\12\ Notice, 83 FR at 40814.
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Second, the proposed rule change would revise the Treasury Policy's
Euro investment guidelines to allow ICC, or an Investment Manager
acting on its behalf, to invest Euro-denominated Customer Origin
Cash.\13\ Currently, the Euro investment guidelines only provide for
the investment of Euro-denominated House Origin Cash. In light of the
fact that the CFTC Order would permit ICC to now invest Euro-
denominated Customer Origin Cash in French and German sovereign debt,
the proposed rule change would apply the Euro investment guidelines to
Customer Origin Cash to allow for such investment.\14\
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\13\ Id.
\14\ CFTC Order, 83 FR at 35244-35245.
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In accordance with the CFTC Order,\15\ the proposed rule change
would amend the Euro investment guidelines to limit permissible
investment, directly and through reverse repurchase agreements
(``reverse repo''), to French and German sovereign debt.\16\ If 100% of
the allocated cash cannot be placed in overnight reverse repo, the
investment guidelines would provide for backup investments in term
reverse repo \17\ and then direct investment in the sovereign debt.\18\
The proposed rule change would apply these changes to both Euro-
denominated Customer Origin Cash and Euro-denominated House Origin
Cash. Previously the Euro investment guidelines permitted investment of
Euro-denominated House Origin Cash in Dutch and Finnish sovereign debt,
in addition to French and German. To be consistent with ICC's treatment
of Customer Origin Cash, the proposed rule change would also limit
investment of House Origin Cash to French and German sovereign debt.
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\15\ Id.
\16\ Notice, 83 FR at 40814.
\17\ With respect to Customer Origin Cash, an investment in term
reverse repo would only be permissible if the Client has the right
of optional early termination upon demand.
\18\ Notice, 83 FR at 40814.
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With respect to Euro-denominated Customer Origin Cash only,
however, the proposed rule change would require that investments comply
with any applicable conditions or restrictions set forth in CFTC
Regulation 1.25 \19\ including any applicable exemptive orders.\20\ The
proposed rule change would also provide that should conditions change
so that the French or German sovereign debt no longer meets the
conditions or restrictions of CFTC Regulation 1.25,\21\ the outside
investment manager shall discontinue making any additional investments
in such sovereign debt issuers.\22\ These limitations would be
necessary to comply with the terms of the CFTC Order.\23\ Because the
CFTC Order only applies to Customer Origin Cash, it is not necessary to
apply these changes to House Origin Cash.\24\
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\19\ 17 CFR 1.25.
\20\ Notice, 83 FR at 40814.
\21\ 17 CFR 1.25.
\22\ Notice, 83 FR at 40814.
\23\ CFTC Order, 83 FR at 35244-35245.
\24\ Id.
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Third, in response to the exemptive relief permitting ICC to invest
Euro-denominated customer funds in French and German sovereign debt,
the proposed rule change would separate the `ICC Investment of Guaranty
Fund and Margin Cash' subsection into USD and Euro headings. The
proposed rule change would add a proposed `Euro' heading, which would
permit ICC's Treasury Department to directly invest Euro-denominated
Customer Origin Cash and House Origin Cash. Under the proposed rule
change, Euro-denominated House Origin Cash and Customer Origin Cash
would be (1) held in bank deposits, (2) allocated to outside investment
managers, or (3) directly held/invested by the ICC Treasury
Department.\25\ Under scenarios (2) and (3), the investment managers or
the ICC Treasury Department, as applicable, would invest the Euro-
denominated House Origin Cash and Euro-denominated Customer Origin Cash
pursuant to the Euro investment guidelines (changes to which are
described above).
---------------------------------------------------------------------------
\25\ Notice, 83 FR at 40814.
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Fourth, the proposed rule change would also move the reference to
ICC's default position of holding U.S. Dollar-denominated Customer
Origin Cash and House Origin Cash in its Federal Reserve Account from
the `Investment Strategy' subsection to the amended `ICC Investment of
Guaranty Fund and Margin Cash' subsection under the proposed USD
heading.\26\ This change would allow ICC to consolidate, under the
proposed USD heading, all of the provisions relating to ICC's use of
the Federal Reserve Account for holding U.S. Dollar-denominated
Customer Origin Cash and House Origin Cash. As described above, the
proposed rule change would also apply this `ICC Investment of Guaranty
Fund and Margin Cash' subsection to Customer Origin Cash.
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\26\ Notice, 83 FR at 40814.
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Further in the proposed `USD' heading, ICC would note that if it is
unable to deposit U.S. Dollar-denominated Customer Origin Cash and
House Origin Cash in its Federal Reserve Account, ICC's Treasury
Department would be able to hold or invest such cash as specified
within the Treasury Policy.\27\ The proposed rule
[[Page 50126]]
change would also correct a typographical error by adding the verb
``has'' to the phrase ``ICE Clear Credit arrangements.'' \28\
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\27\ Id.
\28\ Id.
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B. Changes Relating to Outside Investment Managements and Clean-Up
Changes
To reflect ICC's engagement of multiple outside investment managers
the proposed rule change would remove reference to a specific outside
investment manager in the `Outside Investment Management of Guaranty
Fund and Margin Cash' subsection.\29\ The proposed rule change would
also correct certain typographical errors in this section to improve
readability, including removing the indefinite article ``an'' in the
phrase ``an alternative or additional outside investment managers'',
adding the definite article ``the'' to the phrase ``Investment
Manager's investment'', and changing ``Directory of Treasury'' to
``Director of Treasury'' in a footnote.\30\
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\29\ Id.
\30\ Notice, 83 FR at 40814.
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The proposed rule change would also remove language from the
`Treasury Management for Client Business' section that references the
introduction of client trades to clarify that ICC has already commenced
client clearing.\31\
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\31\ Id.
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III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act directs the Commission to approve a
proposed rule change of a self-regulatory organization if it finds that
such proposed rule change is consistent with the requirements of the
Act and the rules and regulations thereunder applicable to such
organization.\32\ For the reasons given below, the Commission finds
that the proposal is consistent with Section 17A(b)(3)(F) of the Act
\33\ and Rules 17Ad-22(b)(2), 17Ad-22(b)(3), and 17Ad-22(d)(3)
thereunder.\34\
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\32\ 15 U.S.C. 78s(b)(2)(C).
\33\ 15 U.S.C. 78q-1(b)(3)(F).
\34\ 17 CFR 240.17Ad-22(b)(2), (b)(3), and (d)(3).
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A. Consistency With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act requires, among other things, that
the rules of ICC be designed to assure the safeguarding of securities
and funds which are in the custody or control of ICC or for which it is
responsible, and, in general, to protect investors and the public
interest.\35\
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\35\ 15 U.S.C. 78q-1(b)(3)(F).
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As discussed above, the proposed rule change would update the
Treasury Policy in light of the CFTC Order permitting ICC to invest,
subject to certain conditions, Euro-denominated Customer Origin Cash in
French and German sovereign debt. Currently, ICC cannot hold Euro-
denominated cash in its Federal Reserve account. Therefore ICC invests
Euro-denominated House Origin Cash in certain foreign sovereign debt,
but holds Euro-denominated Customer Cash at commercial banks in
unsecured demand deposit accounts. By providing ICC an alternative to
holding Euro-denominated Customer Origin Cash at commercial banks,
where such cash is subject to the credit risk of the commercial bank,
the proposed rule change would help ICC ensure the reliable investment
of assets in ICC's control while at the same time avoiding subjecting
such cash to the credit risk of the commercial bank, thereby providing
ICC with an important alternative for the protection and safeguarding
of Customer Origin Cash and House Origin Cash. And permitting ICC to
use multiple outside investment managers to invest Euro-denominated
Customer Origin and House Origin Cash on behalf of ICC would further
help facilitate the safeguarding of such cash by allowing ICC to employ
as many managers as it may need to make its investments and remove
investment managers who underperform, which would facilitate ICC's
ability to invest such cash in accordance with the Treasury Policy. The
Commission believes that, when compared to credit risk at commercial
banks, French and German sovereign debt is a reasonably safe
investment, and therefore investment by ICC in such debt provides a
safe alternative to deposit in commercial banks and would help assure
the safeguarding of Euro-denominated House Origin Cash and Customer
Origin Cash.
We note that, although permitting ICC to invest Customer Origin
Cash through a reverse repo still exposes ICC to the credit risk of the
counterparty to the reverse repo transaction, unlike placing the cash
in an unsecured demand deposit account at a commercial bank, ICC would
receive German and French Sovereign Debt as collateral against the repo
counterparty's credit risk, thereby helping to mitigate the risk.
Similarly, to the extent a custodian holding the collateral in
connection with a reverse repo transaction entered insolvency
proceedings, ICC would have a claim to specific securities rather than
a general claim against the assets of the custodian, as it would have
with respect to cash on deposit at a commercial bank account, which
could put ICC in a better position to recover losses in case of
insolvency proceedings. For these reasons, the Commission believes that
ICC's investment of Euro-denominated Customer Origin Cash and House
Origin Cash in French and German sovereign debt, under the conditions
of the proposed rule change, would help ICC ensure the reliable
investment of assets in ICC's control while at the same time helping to
assure the safeguarding of such cash by reducing the exposure to
counterparty credit risk from commercial banks.
By helping to assure the safeguarding of Customer Origin Cash and
House Origin Cash, which CPs post to satisfy their clients' margin
requirements and their own margin and GF requirements, the Commission
also believes the proposed changes could help reduce risks to ICC's
margin system and Guaranty Fund, which in turn could help ensure that
ICC is able to continue providing its critical central counterparty
services in the event of a CP default. By ensuring that the assets that
comprise the margin and Guaranty Fund collected by ICC, in the form of
Customer Origin Cash and House Origin Cash, are safely invested and
held in a manner that will allow ICC to access such assets when needed,
the Commission believes that the propose rule change would help improve
the overall effectiveness of ICC's margin system and Guaranty Fund as
risk management tools. For the same reasons, the Commission believes
the proposed rule change would, in general, help protect investors and
the public interest.
Therefore, the Commission finds that the proposed rule change would
assure the safeguarding of securities and funds in ICC's custody and
control, and, in general, protect investors and the public interest,
consistent with the Section 17A(b)(3)(F) of the Act.\36\
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\36\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rules 17Ad-22(b)(2) and 17Ad-22(b)(3)
Rule 17Ad-22(b)(2) requires that ICC establish, implement, maintain
and enforce written policies and procedures reasonably designed to use
margin requirements to limit its credit exposures to participants under
normal market conditions and use risk-based models and parameters to
set margin requirements and review such margin requirements and the
related risk-based models and parameters at least monthly.\37\ Rule
17Ad-22(b)(3) requires that ICC establish, implement, maintain
[[Page 50127]]
and enforce written policies and procedures reasonably designed to
maintain sufficient financial resources to withstand, at a minimum, a
default by the two participant families to which it has the largest
exposures in extreme but plausible market conditions.\38\
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\37\ 17 CFR 240.17Ad-22(b)(2).
\38\ 17 CFR 240.17Ad-22(b)(3).
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As discussed above, the Commission believes that the proposed
changes facilitating the investment of Euro-denominated Customer Origin
Cash and House Origin Cash in French and German sovereign debt would
improve the safeguarding of such cash, and would thereby help reduce
risks to ICC's margin system and GF. As described above, the proposed
rule change would provide ICC two reasonably safe investments for such
cash--French and German sovereign debt--which ICC could use to maintain
and preserve the cash in ICC's margin system and GF, which in turn
could help ICC to maintain margin requirements to limit its credit
exposures to participants under normal market conditions. Likewise, by
improving the safeguarding and investment of the cash in the GF, which
ICC collects from CPs to maintain such sufficient financial resources,
the Commission believes the proposed rule change would help ICC to
maintain sufficient financial resources to withstand, at a minimum, a
default by the two participant families to which it has the largest
exposures in extreme but plausible market conditions.
Therefore, for these reasons, the Commission finds that the
proposed rule change is consistent with Rules 17Ad-22(b)(2) and 17Ad-
22(b)(3).\39\
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\39\ 17 CFR 240.17Ad-22(b)(2), (b)(3).
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C. Consistency With Rule 17Ad-22(d)(3)
Rule 17Ad-22(d)(3) requires that ICC establish, implement, maintain
and enforce written policies and procedures reasonably designed to hold
assets in a manner that minimizes risk of loss or of delay in its
access to them and invest assets in instruments with minimal credit,
market and liquidity risk.\40\
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\40\ 17 CFR 240.17Ad-22(d)(3).
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As described above, the proposed rule change would allow the
investment of Euro-denominated Customer Origin Cash and House Origin
Cash in French and German sovereign debt, allowing ICC to avoid holding
such cash in demand deposits at commercial banks. Moreover, the
proposed rule change would prohibit investment in French and German
sovereign debt when such investment would not comply with the
conditions and restrictions set forth in CFTC Regulation 1.25,\41\ the
CFTC Order, and any other applicable exemptive orders. Such conditions
and restrictions would, among other things, prohibit investment if the
two year credit default spread of France or Germany exceeds 45 basis
points (which the CFTC considered to approximate the risk level of the
United States).\42\ Finally, the Treasury Policy's Euro investment
guidelines would set a target of 100% of investment through overnight
reverse repos, meaning a reverse repo transaction for which the agreed
upon repurchase date is the business day immediately following the
purchase date.
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\41\ 17 CFR 1.25.
\42\ CFTC Order, 83 FR at 35243-35245.
---------------------------------------------------------------------------
For all the reasons discussed above, the Commission believes that
in facilitating investment in French and German sovereign debt with
minimal credit risk and creating risk controls surrounding such
investments, the proposed rule change would allow ICC to hold Customer
Origin Cash and House Origin Cash in a manner that minimizes risk of
loss or of delay in ICC's access to them and would allow ICC to invest
such funds in instruments with minimal credit, market and liquidity
risk.
Therefore, for these reasons, the Commission finds that the
proposed rule change is consistent with Rule 17Ad-22(d)(3).\43\
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\43\ 17 CFR 240.17Ad-22(d)(3).
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IV. Conclusion
On the basis of the foregoing, the Commission finds that the
proposal is consistent with the requirements of the Act, and in
particular, with the requirements of Section 17A(b)(3)(F) of the Act
\44\ and Rules 17Ad-22(b)(2), 17Ad-22(b)(3), and 17Ad-22(d)(3)
thereunder.\45\
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\44\ 15 U.S.C. 78q-1(b)(3)(F).
\45\ 17 CFR 240.17Ad-22(b)(2), (b)(3), and (d)(3).
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It is therefore ordered pursuant to Section 19(b)(2) of the Act
\46\ that the proposed rule change (SR-ICC-2018-009) be, and hereby is,
approved.\47\
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\46\ 15 U.S.C. 78s(b)(2).
\47\ In approving the proposed rule change, the Commission
considered the proposal's impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\48\
Eduardo A. Aleman,
Assistant Secretary.
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\48\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2018-21585 Filed 10-3-18; 8:45 am]
BILLING CODE 8011-01-P