Notice2024-09325
Self-Regulatory Organizations; NYSE Arca, Inc.; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change To List and Trade Shares of the COtwo Advisors Physical European Carbon Allowance Trust Under NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares)
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Published
May 1, 2024
Issuing agencies
Securities and Exchange Commission
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<title>Federal Register, Volume 89 Issue 85 (Wednesday, May 1, 2024)</title>
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[Federal Register Volume 89, Number 85 (Wednesday, May 1, 2024)]
[Notices]
[Pages 35289-35292]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-09325]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-100029; File No. SR-NYSEARCA-2024-05]
Self-Regulatory Organizations; NYSE Arca, Inc.; Order Instituting
Proceedings To Determine Whether To Approve or Disapprove a Proposed
Rule Change To List and Trade Shares of the COtwo Advisors Physical
European Carbon Allowance Trust Under NYSE Arca Rule 8.201-E
(Commodity-Based Trust Shares)
April 25, 2024.
I. Introduction
On January 10, 2024, NYSE Arca, Inc. (``NYSE Arca'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to list and trade shares
(``Shares'') of the COtwo Advisors Physical European Carbon Allowance
Trust under NYSE Arca Rule 8.201-E. The proposed rule change was
published for comment in the Federal Register on January 26, 2024.\3\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 99409 (January 22,
2024), 89 FR 5273 (``Notice'').
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On March 4, 2024, pursuant to Section 19(b)(2) of the Act,\4\ the
Commission designated a longer period within which to approve the
proposed rule change, disapprove the proposed rule change, or institute
proceedings to determine whether to disapprove the proposed rule
change.\5\ The Commission has not received any comments on the proposed
rule change. The Commission is publishing this order to institute
proceedings pursuant to Section 19(b)(2)(B) of the Act \6\ to determine
whether to disapprove the proposed rule change.
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\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 99668, 89 FR 16808
(March 8, 2024). The Commission designated April 25, 2024, as the
date by which the Commission shall approve or disapprove, or
institute proceedings to determine whether to disapprove, the
proposed rule change.
\6\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposed Rule Change <SUP>7</SUP>
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\7\ Additional information regarding the Trust and the Shares
can be found in the Notice, supra note 3.
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The Exchange proposes to list and trade Shares of the COtwo
Advisors Physical European Carbon Allowance Trust (``Trust'') \8\ under
NYSE Arca Rule 8.201-E, which governs the listing and trading of
Commodity-Based Trust Shares \9\ on the Exchange. The sponsor of the
Trust is COtwo Advisors LLC, a Delaware limited liability company
(``Sponsor'').
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\8\ On May 12, 2023, the Trust filed with the Commission a
registration statement on Form S-1 (File No. 333-271910)
(``Registration Statement'') under the Securities Act of 1933. The
Exchange represents that the Registration Statement is not yet
effective, and the Shares will not trade on the Exchange until such
time that the Registration Statement is effective. The Exchange
further represents that the Trust will not be registered as an
investment company under the Investment Company Act of 1940, as
amended, and that the Trust is not a commodity pool for purposes of
the Commodity Exchange Act, as amended. See Notice, supra note 3, 89
FR at 5274.
\9\ The Exchange represents that the Shares will satisfy the
requirements of NYSE Arca Rule 8.201-E and thereby qualify for
listing on the Exchange, and that the Trust relies on the exemption
contained in Rule 10A-3(c)(7) regarding the application of Rule 10A-
3 (17 CFR 240.10A-3) under the Act. See Notice, supra note 3, 89 FR
at 5274.
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Description of the Operation of the Trust
According to the Exchange, the investment objective of the Trust
will be for the Shares to reflect the performance of the price of EU
Carbon Emission Allowances for stationary installations (``EUAs''),
less the Trust's expenses.\10\ The Trust intends to achieve its
objective by investing all of its assets in EUAs on a non-discretionary
basis (i.e., without regard to whether the value of EUAs is rising or
falling over any particular period).\11\ The Trust will not hold any
assets other than EUAs and, possibly, a very limited amount of cash to
pay Trust expenses.\12\
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\10\ See Notice, supra note 3, 89 FR at 5274.
\11\ See id.
\12\ See id. The Trust may also cause the Sponsor to receive
EUAs from the Trust in such a quantity as may be necessary to pay
the Sponsor's annual fee. See id.
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The Trust will not invest in futures, options, options on futures,
or swap contracts.\13\ The Trust will not hold or trade in commodity
futures contracts, ``commodity interests,'' or any other instruments
regulated by the Commodity Exchange Act.\14\ The Trust's cash custodian
may hold cash proceeds from EUA sales to pay Trust expenses. All EUAs
will be held in the Union Registry (defined below).\15\
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\13\ See id.
\14\ See id.
\15\ See id.
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The Trust will value its Shares daily based on the value of EUAs as
reflected by the EUA End of Day Index value, as published by the
European Energy Exchange AG (``EEX'').\16\ The administrator of the
Trust will determine the net asset value (``NAV'') of the Trust once
each Exchange trading day, which will be released after the end of the
Core Trading Session, which is typically 4 p.m. New York time \17\ When
the Trust sells or redeems its Shares, it will do so in ``in-kind''
transactions with authorized participants in blocks of 50,000
Shares.\18\
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\16\ See id. at 5279. The EUA End of Day Index methodology is
available at <a href="https://www.eex.com/fileadmin/EEX/Downloads/Trading/Specifications/Indeces/DE/20211005_Index_Description_v010.pdf">https://www.eex.com/fileadmin/EEX/Downloads/Trading/Specifications/Indeces/DE/20211005_Index_Description_v010.pdf</a>.
According to the Exchange, the value of the EUA End of Day Index is
calculated based on an algorithm using data regarding the prices of
qualifying trades and the average bids and asks of orders that meet
certain order quantity requirements. See Notice, supra note 3, 89 FR
at 5276. In order for data regarding trades and orders to be used
for calculating the value of the EUA End of Day Index, the trades or
orders must satisfy certain requirements regarding (i) quantity of
traded contracts, (ii) quantity of contracts per order, (iii)
minimum duration of the cumulated valid best bid and best ask, and
(iv) maximum spread per contract. The EUA End of Day Index
calculation methodology depends on the number of valid trades and
orders which fulfil the product-specific parameters. See id. The
data used for calculating the EUA End of Day Index can also come
from fair values collected in a price committee or from other price
sources. See id. The EUA End of Day Index price calculated is then
validated against actual market prices. See id.
\17\ See id. at 5279. The administrator also converts the value
of Euro denominated assets into US Dollar equivalent using published
foreign currency exchange prices by an independent pricing vendor.
See id.
\18\ See id. at 5278.
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EUAs and the EUA Markets
According to the Exchange, the European Union Emissions Trading
System (``EU ETS'') is a ``cap and trade'' system that caps the total
volume of greenhouse gas emissions from installations and aircraft
operators.\19\ The EU ETS is administered by the EU Commission, which
issues a predefined amount of EUAs through auctions or free
allocation.\20\ An EUA represents the right to emit one metric ton of
carbon
[[Page 35290]]
dioxide equivalent into the atmosphere by operators of stationary
installations (``Covered Entities'').\21\ By the end of April each
year, all Covered Entities are required to surrender EUAs equal to the
total volume of actual emissions from their installation for the last
calendar year.\22\ EU ETS operators can buy or sell EUAs to achieve EU
ETS compliance.\23\
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\19\ There are two types of EU emissions allowances: (i) general
allowances for stationary installations, or EUA; and (ii) allowances
for the aviation sector. See id. at 5274. The Trust will not hold
any assets other than EUAs and, possibly, a very limited amount of
cash to pay Trust expenses. See id.
\20\ See id. at 5274-75.
\21\ See id. at 5275.
\22\ See id.
\23\ See id.
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In 2012, EU ETS operations were centralized into a single EU
registry operated by the EU Commission (the ``Union Registry''), which
covers all countries participating in the EU ETS.\24\ According to the
Exchange, the Union Registry is an online database that holds accounts
for all entities covered by the EU ETS as well as for participants
(such as the Trust) not covered under the EU ETS.\25\ An account must
be opened in the Union Registry by a legal or natural person before
being able to participate in the EU ETS and transact in EUAs.\26\ The
European Union Transaction Log (``EUTL'') \27\ checks, records and
authorizes all transactions that take place between accounts in the
Union Registry to ensure that transfers are in accordance with the EU
ETS rules.\28\ The Union Registry is at all times responsible for
holding all EUAs.\29\
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\24\ See id.
\25\ See id.
\26\ See id.
\27\ The EUTL is a central transaction log that checks and
records all transactions taking place within the EU ETS. It is run
by the European Commission and provides an easy access to emission
trading data contained in the EUTL. See <a href="https://www.eea.europa.eu/data-and-maps/dashboards/emissions-trading-viewer-1">https://www.eea.europa.eu/data-and-maps/dashboards/emissions-trading-viewer-1</a>.
\28\ See Notice, supra note 3, 89 FR at 5275.
\29\ See id.
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The spot and futures markets for EUAs have existed since 2005 after
the formal launch of the EU ETS on January 1, 2005.\30\ Spot EUA
contracts are traded exclusively on EEX,\31\ and futures contracts are
traded on EEX, ICE Endex Markets B.V. (``ICE Endex''),\32\ and Nasdaq
Oslo.\33\ Additionally, options on EUA futures contracts are traded on
EEX and ICE Endex, but not on Nasdaq Oslo.\34\
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\30\ See id.
\31\ See id. See also <a href="https://www.esma.europa.eu/sites/default/files/EEX_1.pdf">https://www.esma.europa.eu/sites/default/files/EEX_1.pdf</a>; and Rules and Regulations at <a href="https://www.eex.com/en/markets/trading-ressources/rules-and-regulations">https://www.eex.com/en/markets/trading-ressources/rules-and-regulations</a>.
\32\ See Notice, supra note 3, 89 FR at 5275. See also https://
www.ice.com/endex/
regulation#:~:text=The%20Dutch%20Authority%20for%20Consumers,energy%2
0industry%20and%20wholesale%20trading.
\33\ See Notice, supra note 3, 89 FR at 5275.
\34\ See id.
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According to the Exchange, there are currently two primary avenues
for trading EUAs: a primary market and a secondary market.\35\ The
primary market involves participation in a regularly scheduled
auction.\36\ EUA auctions are held on a near-daily basis throughout the
year, other than between mid-December to mid-January, when auctions are
paused.\37\ EUA auctions take place exclusively on EEX.\38\ Prices
achieved in these auctions are published on various publicly-accessible
websites, including the European Commission's primary website.\39\ The
secondary market involves transactions between buyers and sellers on
regulated markets. The contracts offered for trading are the following:
(1) instruments with a daily expiry, including spot EUAs \40\ and a
single day futures contract on EUAs (``Daily EUA Future''),\41\ (2)
futures contracts with various maturities; \42\ and (3) options on
futures contracts.\43\ There are also over-the-counter transactions,
but, according to the Exchange, they comprise a negligible percentage
of transactions.\44\
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\35\ See id.
\36\ See id.
\37\ See id. at 5276.
\38\ See id.
\39\ See id.
\40\ See id.
\41\ See id. The Daily EUA Future is exclusively traded on ICE
Endex and is a deliverable contract where each person with a
position open at cessation of trading is obliged to make or take
delivery of EUAs upon the expiration of the contract at the end of
each trading day. See id. Each Daily EUA Future represents one lot
of 1,000 EUAs. See id.
\42\ See id. at 5278.
\43\ See id.
\44\ See id.
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The Exchange states that the daily EUA End of Day Index value can
be expected to be substantially identical to the daily settlement price
of the Daily EUA Future.\45\ In support of this statement, the Exchange
provided a comparison of the daily EUA End of Day Index value and the
Daily EUA Future settlement price over a 45 calendar day period from
October 26, 2023 through December 8, 2023.\46\ Additionally, the
Exchange provided a chart showing the spot prices in continuous trading
on the EEX and the intra-day prices of Daily EUA Futures on ICE Endex,
in EUR/tCO2 from January 2018 to January 2022 to illustrate how the
Daily EUA Future reflects the EUA spot price during the trading
day.\47\
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\45\ See id.
\46\ See id. at 5276-77.
\47\ See id. at 5277.
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Surveillance
In support of its proposal, the Exchange states that trading in the
Shares will be subject to the existing trading surveillances
administered by the Exchange, as well as cross-market surveillances
administered by the Financial Industry Regulatory Authority Inc.
(``FINRA''), on behalf of the Exchange, which are designed to detect
violations of Exchange rules and applicable federal securities
laws.\48\ The Exchange states that these procedures are adequate to
properly monitor Exchange trading of 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.\49\
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\48\ See Notice, supra note 3, 89 FR at 5280. FINRA conducts
cross-market surveillances on behalf of the Exchange pursuant to a
regulatory services agreement. The Exchange is responsible for
FINRA's performance under this regulatory services agreement. See
id.
\49\ See id.
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The Exchange has entered into a comprehensive surveillance sharing
agreement (``CSSA'') with ICE Endex.\50\ The Exchange states that,
pursuant to the CSSA, it will communicate as needed regarding trading
in the Shares and Daily EUA Futures with ICE Endex, and may obtain
trading information regarding trading in the Shares and Daily EUA
Futures from ICE Endex.\51\
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\50\ See id.
\51\ See id.
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III. Proceedings to Determine Whether To Approve or Disapprove SR-
NYSEARCA-2024-05 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \52\ to determine whether the proposed rule
change should be approved or disapproved. Institution of such
proceedings is appropriate at this time in view of the legal and policy
issues raised by the proposal. Institution of proceedings does not
indicate that the Commission has reached any conclusions with respect
to any of the issues involved. Rather, as described below, the
Commission seeks and encourages interested persons to provide comments
on the proposed rule change.
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\52\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Act,\53\ the Commission is
providing notice of the grounds for disapproval under consideration.
The Commission is instituting proceedings to allow for additional
analysis of the proposal's consistency with Section 6(b)(5) of the Act,
which requires, among other things, that the rules of a national
securities exchange be ``designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade,'' and ``to
[[Page 35291]]
protect investors and the public interest.'' \54\
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\53\ Id.
\54\ 15 U.S.C. 78f(b)(5).
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The Commission asks that commenters address the sufficiency of the
Exchange's statements in support of the proposal, which are set forth
in the Notice, in addition to any other comments they may wish to
submit about the proposed rule change. In particular, the Commission
seeks comment on the following questions and asks commenters to submit
data where appropriate to support their views:
1. Given the nature of the underlying assets held by the Trust,
what are commenters' views on whether the proposed Trust and Shares
would be susceptible to manipulation? What are commenters' views
generally on whether the Exchange's proposal is designed to prevent
fraudulent and manipulative acts and practices? What are commenters'
views generally with respect to the liquidity and transparency of the
EUA spot and futures markets and such markets' susceptibility to
manipulation? Are there particular features related to the EUA markets
and the EUA ecosystem that raise unique concerns about whether the
proposed Trust, which would hold EUAs and, possibly, a very limited
amount of cash, would be susceptible to fraud or manipulation?
2. According to the Exchange, EEX calculates and publishes its EUA
End of Day Index on the price of spot EUAs. The value of the EUA End of
Day Index is calculated based on an algorithm using data regarding the
prices of qualifying trades and the average bids and asks of orders
that meet certain order quantity requirements.\55\ What are commenters'
views on whether the EUA End of Day Index is an accurate basis to price
spot EUAs for purposes of NAV calculation and valuing the Shares of the
Trust?
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\55\ See Notice, supra note 3, 89 FR at 5276.
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3. The Exchange states that ``[g]iven the significant size of ICE
Endex, there is a reasonable likelihood that a market participant
attempting to manipulate the Trust Shares would also have to trade on
ICE Endex to successfully manipulate the Trust Shares.'' \56\ In
addition, the Exchange states that ``[i]t is unlikely that trading in
the Trust Shares would be the predominant influence on Daily EUA
Futures prices traded on ICE Endex for a number of reasons, including
the significant volume in and size of the EUA daily expiry market.''
\57\ Based on data and analysis provided by the Exchange,\58\ do
commenters agree with the Exchange that ICE Endex, on which the Daily
EUA Futures trade, represents a regulated market of significant size
related to spot EUAs? \59\ What are commenters' views on whether there
is a reasonable likelihood that a person attempting to manipulate the
Shares would also have to trade on ICE Endex to manipulate the Shares?
\60\ Do commenters agree with the Exchange that trading in the Shares
would not be the predominant influence on prices in the Daily EUA
Futures market? \61\
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\56\ See id. at 5280-81.
\57\ See id.
\58\ See Notice, supra note 3.
\59\ See Notice, supra note 3, 89 FR at 5280.
\60\ See id.
\61\ See id.
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4. The Exchange states that the ``the correlation between the EUA
End of Day Index value that reflects the value of the spot EUAs traded
on EEX and the Daily EUA Future settlement price is nearly perfect,''
and ``[t]hus, on any given day, the value of an EUA purchased on EEX or
an EUA received after settling a Daily EUA Future traded on ICE Endex
is the same.'' \62\ The Exchange concludes that ``[w]hile it is
possible that a potential manipulator could chose to trade only in the
spot EUA market (EEX), the near-perfect correlation between the EUA End
of Day Index value and the Daily EUA Future settlement price means that
a price distortion in the spot EUA market would be reflected in the
Daily EUA Futures market and vice versa.'' \63\ What are commenters'
views on the correlation between the EUA End of Day Index value and the
Daily EUA Future settlement price? What are commenters' views on the
correlation between the spot EUA market and the ICE Endex futures
market? What are commenters' views on the extent to which a CSSA with
ICE Endex would assist in detecting and deterring fraud and
manipulation that impacts an exchange-traded product that holds spot
EUAs, and on whether the Exchange's correlation analysis \64\ provides
any evidence to this effect?
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\62\ See id.
\63\ See id.
\64\ See Notice, supra note 3.
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IV. Procedure: Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
issues identified above, as well as any other concerns they may have
with the proposal. In particular, the Commission invites the written
views of interested persons concerning whether the proposed rule change
is consistent with Section 6(b)(5) or any other provision of the Act,
or the rules and regulations thereunder. Although there do not appear
to be any issues relevant to approval or disapproval that would be
facilitated by an oral presentation of views, data, and arguments, the
Commission will consider, pursuant to Rule 19b-4, any request for an
opportunity to make an oral presentation.\65\
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\65\ Section 19(b)(2) of the Act, as amended by the Securities
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the
Commission flexibility to determine what type of proceeding--either
oral or notice and opportunity for written comments--is appropriate
for consideration of a particular proposal by a self-regulatory
organization. See Securities Act Amendments of 1975, Senate Comm. on
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st
Sess. 30 (1975).
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Interested persons are invited to submit written data, views, and
arguments regarding whether the proposed rule change should be approved
or disapproved by May 22, 2024. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal by
June 5, 2024.
Comments may be submitted by any of the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#1d6f687178307e7270707873696e5d6e787e337a726b"><span class="__cf_email__" data-cfemail="483a3d242d652b2725252d263c3b083b2d2b662f273e">[email protected]</span></a>. Please include
file number SR-NYSEARCA-2024-05 on the subject line.
Paper Comments
<bullet> 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-2024-05. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>). 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
[[Page 35292]]
available for website viewing and printing in the Commission's Public
Reference Room, 100 F Street NE, Washington, DC 20549, on official
business days between the hours of 10 a.m. and 3 p.m. Copies of the
filing also will be available for inspection and copying at the
principal office of the Exchange. Do not include personal identifiable
information in submissions; you should submit only information that you
wish to make available publicly. We may redact in part or withhold
entirely from publication submitted material that is obscene or subject
to copyright protection. All submissions should refer to file number
SR-NYSEARCA-2024-05 and should be submitted on or before May 22, 2024.
Rebuttal comments should be submitted by June 5, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\66\
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\66\ 17 CFR 200.30-3(a)(57).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-09325 Filed 4-30-24; 8:45 am]
BILLING CODE 8011-01-P
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