Notice2024-22560
Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change To Modify the GSD Rules Relating to the Adoption of a Trade Submission Requirement
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
October 2, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 191 (Wednesday, October 2, 2024)</title>
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[Federal Register Volume 89, Number 191 (Wednesday, October 2, 2024)]
[Notices]
[Pages 80296-80299]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-22560]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101194; File No. SR-FICC-2024-009]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Order Instituting Proceedings To Determine Whether To Approve or
Disapprove a Proposed Rule Change To Modify the GSD Rules Relating to
the Adoption of a Trade Submission Requirement
September 26, 2024.
I. Introduction
On June 12, 2024, Fixed Income Clearing Corporation (``FICC'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change SR-FICC-2024-009 pursuant to Section 19(b) of the
Securities Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4
\2\ thereunder to modify FICC's Government Securities Division
(``GSD'') Rulebook (``GSD Rules'') as it relates to the adoption of a
requirement for its direct participants to submit for clearance and
settlement all eligible secondary market transactions in U.S. Treasury
securities to which such direct participant is a counterparty.\3\ The
Proposed Rule Change was published for public comment in the Federal
Register on July 1, 2024.\4\ The Commission has received comments
regarding the substance of the changes proposed in the Proposed Rule
Change.\5\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Notice of Filing, infra note 4, at 89 FR 54602.
\4\ Securities Exchange Act Release No. 100417 (June 25, 2024),
89 FR 54602 (July 1, 2024) (File No. SR-FICC-2024-009) (``Notice of
Filing'').
\5\ Comments on the Proposed Rule Change are available at
<a href="https://www.sec.gov/comments/sr-ficc-2024-009/srficc2024009.htm">https://www.sec.gov/comments/sr-ficc-2024-009/srficc2024009.htm</a>.
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On August 16, 2024, pursuant to Section 19(b)(2) of the Exchange
Act,\6\ the Commission designated a longer period within which to
approve, disapprove, or institute proceedings to determine whether to
approve or disapprove the Proposed Rule Change.\7\ The Commission is
instituting proceedings, pursuant to Section 19(b)(2)(B) of the
Exchange Act,\8\ to determine whether to approve or disapprove the
Proposed Rule Change.
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\6\ 15 U.S.C. 78s(b)(2).
\7\ Securities Exchange Act Release No. 100693 (Aug. 12, 2024),
89 FR 66746 (Aug. 16, 2024) (File No. SR-FICC-2024-009).
\8\ 15 U.S.C. 78s(b)(2)(B).
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[[Page 80297]]
II. Summary of the Proposed Rule Change
A. Background
FICC, through GSD, serves as a central counterparty and provider of
clearance and settlement services for the U.S. government securities
markets, including U.S. Treasury securities. GSD's central counterparty
services are available directly to entities that are approved to be
Netting Members \9\ and indirectly to other market participants through
its indirect access models.
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\9\ The GSD Rules are available at https://www.dtcc.com/~/media/
Files/Downloads/legal/rules/ficc_gov_rules.pdf. Terms not otherwise
defined herein are defined in the GSD Rules.
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On December 13, 2023, the Commission adopted amendments to the
standards applicable to covered clearing agencies for U.S. Treasury
securities, such as FICC,\10\ requiring, among other things, that such
clearing agency establish objective, risk-based, and publicly disclosed
criteria for participation which (i) require that any direct
participant of such covered clearing agency submit for clearance and
settlement all of the eligible secondary market transactions to which
they are a counterparty; and (ii) identify and monitor its direct
participants' submission of eligible secondary market transactions to
which they are a counterparty, including how the covered clearing
agency would address a failure to submit transactions in accordance
with this requirement.\11\ According to FICC, the Proposed Rule Change
is designed to meet these new requirements and to further update FICC's
risk management framework, including its initial and ongoing
participation criteria, and requirements relating to financial
resources, creditworthiness, and operational capability, to limit the
risks a Netting Member may present to FICC and the other Netting
Members by ensuring, among other things, that applicants to be Netting
Members have the financial and operational capabilities to meet the
obligations of membership on an ongoing basis.\12\
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\10\ A ``covered clearing agency'' is, among other things, a
registered clearing agency that provides the services of a central
counterparty, and a central counterparty is a clearing agency that
interposes itself between the counterparties to securities
transactions, acting functionally as the buyer to every seller and
the seller to every buyer. 17 CFR 240.17Ad-22(a); see also 15 U.S.C.
78c(a)(23) (defining a clearing agency). FICC is a clearing agency
registered with the Commission under Section 17A of the Exchange Act
(15 U.S.C. 78q-1), and it acts as a central counterparty.
\11\ 17 CFR 240.17ad-22(e)(18)(iv)(A) and (B). See Securities
Exchange Act Release No. 99149 (Dec. 13, 2023), 89 FR 2714 (Jan. 16,
2024) (``Adopting Release,'' and the rules adopted therein referred
to herein as ``Treasury Clearing Rules'').
\12\ See Notice of Filing, supra note 4, at 54604.
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B. Proposed Changes
First, the Proposed Rule Change would adopt an ongoing membership
requirement that all Netting Members submit for clearance and
settlement eligible secondary market transactions to which they are a
party and would specify the scope of this requirement by defining
``Eligible Secondary Market Transactions,'' adopting such and related
definitions from the Treasury Clearing Rules.\13\ Specifically, under
FICC's proposed rules, an Eligible Secondary Market Transaction would
include: a repurchase or reverse repurchase agreement collateralized by
U.S. Treasury securities in which one of the counterparties is a direct
participant; a purchase or sale between a direct participant and any
counterparty, if the direct participant of the covered clearing agency
brings together multiple buyers and sellers using a trading facility
(such as a limit order book) and is a counterparty to both the buyer
and seller in two separate transactions; and a purchase or sale between
a direct participant and a registered broker-dealer, government
securities broker, or government securities dealer. Under FICC's
proposed rules, an Eligible Secondary Market Transaction would not
include: any purchase or sale transaction in U.S. Treasury securities
or repurchase or reverse repurchase agreement collateralized by U.S.
Treasury securities in which one counterparty is a central bank, a
sovereign entity, an international financial institution, or a natural
person; any repurchase or reverse repurchase agreement collateralized
by U.S. Treasury securities in which one counterparty is a covered
clearing agency providing central counterparty services or a
derivatives clearing organization, or is regulated as a central
counterparty in its home jurisdiction; any repurchase or reverse
repurchase agreement collateralized by U.S. Treasury securities in
which one counterparty is a state or local government; or any
repurchase or reverse repurchase agreement collateralized by U.S.
Treasury securities entered into between a direct participant and an
affiliated counterparty provided that the affiliated counterparty
submit for clearance and settlement all other repurchase or reverse
repurchase agreements collateralized by U.S. Treasury securities to
which the affiliate is a party. In addition, FICC proposes conforming
certain aspects of those defined terms to the GSD Rules to provide
Netting Members with clarity on the scope of this trade submission
requirement. FICC states that these changes would be consistent with
and implement the changes to Rule 17Ad-22(e)(18)(iv)(A) \14\ regarding
the requirement for its direct participants to submit for clearance and
settlement all Eligible Secondary Market Transactions.\15\
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\13\ Supra note 11. See also 17 CFR 240.17ad-22(a).
\14\ 17 CFR 240.17ad-22(e)(18)(iv)(A).
\15\ See Notice of Filing, supra note 4, at 54604.
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Second, the Proposed Rule Change would adopt provisions to enable
FICC to identify and monitor Netting Members' ongoing compliance with
the proposed trade submission requirement. These provisions would
include affirmative obligations of Netting Members to notify FICC of
non-compliance and confirm their ongoing compliance with this
requirement. These would consist of requirements for Netting Members to
provide FICC annual attestation regarding ongoing compliance with the
trade submission requirement, and to conduct an independent review of
ongoing compliance with the trade submission requirement on a triennial
basis to be provided to FICC and the Netting Member's most senior
governing body. These provisions would also provide FICC with the
authority to request information or review a Netting Member's books and
records to monitor and verify, as needed, such compliance.
The Proposed Rule Change would also adopt disciplinary measures
that FICC would take if a Netting Member fails to meet its obligations
under the new rules, which would include continuing fines, to be
incorporated into the GSD Fine Schedule, until the failure has been
remediated and notifications to applicable regulatory authorities. FICC
states that these changes would facilitate its ability to identify and
monitor the trade submission requirement, as required of FICC under
Rule 17Ad-22(e)(18)(iv)(B) \16\ regarding the identification and
monitoring of its direct participants' submission of Eligible Secondary
Market Transactions for clearing.\17\
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\16\ 17 CFR 240.17ad-22(e)(18)(iv)(B).
\17\ See Notice of Filing, supra note 4, at 54606.
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[[Page 80298]]
Lastly, FICC proposes to amend certain of the initial
qualifications for direct membership with GSD and the ongoing
membership obligations of Netting Members. The changes related to
initial membership requirements include explicitly requiring adequate
liquidity through adequate resources; allowing FICC to review a
Guarantor when an applicant or Member relies on such; requiring
applicants to provide FICC with a business plan that demonstrates the
applicant's ability to meet FICC requirements and that they have at
least one year of ``operating and management history and outlook'' or,
absent one year, permitting FICC to determine whether the applicant has
personnel with sufficient operational and financial background and
experience; and clearly stating that FICC can deny an applicant's
membership under certain circumstances, and if denied under any
circumstance, not permit reapplication until the applicant has
adequately addressed the reason for the denial. The changes related to
ongoing membership requirements relate to the production of financial
statements by Affiliates of a Member; Member's responses to FICC's
annual and periodic due diligence information requests; Member's
notifications to FICC if the Member breaches its GSD membership
standards; and an adequate assurances condition on Funds-Only Settling
Bank Members that could limit the number of Netting Members for which
the bank provides settlement services.
FICC states that these changes would clarify and strengthen
membership standards to help mitigate the credit exposure that Netting
Members present to FICC and, thus, continue to promote the safety and
soundness of FICC, its Members, and the industry it serves, and that
these changes would be consistent with FICC's authority under Section
17A(b)(4)(B) of the Exchange Act.\18\
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\18\ 15 U.S.C. 78q-1(b)(4)(B). See Notice of Filing, supra note
4, at 54608.
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III. Proceedings To Determine Whether To Approve or Disapprove the
Proposed Rule Change and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Exchange Act to determine whether the Proposed Rule
Change should be approved or disapproved.\19\ Institution of
proceedings is appropriate at this time in view of the legal and policy
issues raised by the Proposed Rule Change. Institution of proceedings
does not indicate that the Commission has reached any conclusions with
respect to any of the issues involved. Rather, the Commission seeks and
encourages interested persons to comment on the Proposed Rule Change,
which would provide the Commission with arguments to support the
Commission's analysis as to whether to approve or disapprove the
Proposed Rule Change.
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\19\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Exchange Act,\20\ the
Commission is providing notice of the grounds for disapproval under
consideration. The Commission is instituting proceedings to allow for
additional analysis of, and input from commenters with respect to, the
Proposed Rule Change's consistency with Section 17A of the Exchange Act
\21\ and the rules thereunder, including the following provisions:
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\20\ Id.
\21\ 15 U.S.C. 78q-1.
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<bullet> Section 17A(b)(3)(F) of the Exchange Act,\22\ which
requires, among other things, that the rules of a clearing agency are
designed to promote the prompt and accurate clearance and settlement of
securities transactions, as well as to foster cooperation and
coordination with persons engaged in the clearance and settlement of
securities transactions; and, in general, to protect investors and the
public interest;
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\22\ 15 U.S.C. 78q-1(b)(3)(F).
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<bullet> Section 17A(b)(3)(G) of the Exchange Act,\23\ which
requires that the rules of a clearing agency provide that its
participants shall be appropriately disciplined for violation of any
provision of the rules of the clearing agency by expulsion, suspension,
limitation of activities, functions, and operations, fine, censure, or
any other fitting sanction;
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\23\ 15 U.S.C. 78q-1(b)(3)(G).
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<bullet> Section 17A(b)(3)(I) of the Exchange Act,\24\ which
requires that the rules of a clearing agency do not impose any burden
on competition not necessary or appropriate;
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\24\ 15 U.S.C. 78q-1(b)(3)(I).
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<bullet> Section 17A(b)(4)(B) of the Exchange Act,\25\ which
requires that a registered clearing agency may deny participation to,
or condition the participation of, any person if such person does not
meet such standards of financial responsibility, operational
capability, experience, and competence as are prescribed by the rules
of the clearing agency, and may examine and verify the qualifications
of an applicant to be a participant in accordance with procedures
established by the rules of the clearing agency;
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\25\ 15 U.S.C. 78q-1(b)(4)(B).
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<bullet> Rule 17ad-22(e)(18)(i) under the Exchange Act,\26\ which
requires that a covered clearing agency establish, implement, maintain,
and enforce written policies and procedures reasonably designed to
establish objective, risk-based, and publicly disclosed criteria for
participation, which permit fair and open access by direct and, where
relevant, indirect participants and other financial market utilities;
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\26\ 17 CFR 240.17ad-22(e)(18)(i).
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<bullet> Rule 17ad-22(e)(18)(ii) under the Exchange Act,\27\ which
requires that a covered clearing agency establish, implement, maintain,
and enforce written policies and procedures reasonably designed to
establish objective, risk-based, and publicly disclosed criteria for
participation, which require participants to have sufficient financial
resources and robust operational capacity to meet obligations arising
from participation in the clearing agency;
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\27\ 17 CFR 240.17ad-22(e)(18)(ii).
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<bullet> Rule 17ad-22(e)(18)(iii) under the Exchange Act,\28\ which
requires that a covered clearing agency establish, implement, maintain,
and enforce written policies and procedures reasonably designed to
establish objective, risk-based, and publicly disclosed criteria for
participation, which monitor compliance with such participation
requirements on an ongoing basis;
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\28\ 17 CFR 240.17ad-22(e)(18)(iii).
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<bullet> Rule 17ad-22(e)(18)(iv)(A) under the Exchange Act,\29\
which requires that a covered clearing agency establish, implement,
maintain, and enforce written policies and procedures reasonably
designed to establish objective, risk-based, and publicly disclosed
criteria for participation, which, when the covered clearing agency
provides central counterparty services in transactions in U.S. Treasury
securities, require that any direct participant of such covered
clearing agency submit for clearance and settlement all of the eligible
secondary market transactions to which such direct participant is a
counterparty;
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\29\ 17 CFR 240.17ad-22(e)(18)(iv)(A).
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<bullet> Rule 17ad-22(e)(18)(iv)(B) under the Exchange Act,\30\
which requires that a covered clearing agency establish, implement,
maintain, and enforce written policies and procedures reasonably
designed to establish objective, risk-based, and publicly disclosed
criteria for participation,
[[Page 80299]]
which, when the covered clearing agency provides central counterparty
services in transactions in U.S. Treasury securities, identify and
monitor its direct participants' submission of transactions for
clearing as required by Rule 17ad-22(e)(18)(iv)(A), including how the
clearing agency would address a failure to submit transactions in
accordance with Rule 17ad-22(e)(18)(iv)(A); and
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\30\ 17 CFR 240.17ad-22(e)(18)(iv)(B).
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<bullet> Rule 17ad-22(e)(23)(ii) under the Exchange Act,\31\ which
requires that a covered clearing agency establish, implement, maintain,
and enforce written policies and procedures reasonably designed to
provide sufficient information to enable participants to identify and
evaluate the risks, fees, and other material costs they incur by
participating in the covered clearing agency.
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\31\ 17 CFR 240.17ad-22(e)(23)(ii).
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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 Proposed Rule Change. In particular, the Commission invites
the written views of interested persons concerning whether the Proposed
Rule Change is consistent with Section 17A(b)(3)(F), (G), and (I), and
(b)(4)(B) \32\ and Rules 17ad-22(e)(18)(i), (ii), (iii), (iv)(A) and
(B), and (e)(23)(ii) \33\ of the Exchange Act, or any other provision
of the Exchange 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(g) under the Exchange Act,\34\ any request for an opportunity to
make an oral presentation.\35\
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\32\ 15 U.S.C. 78q-1(b)(3)(F), 15 U.S.C. 78q-1(b)(3)(G), 15
U.S.C. 78q-1(b)(3)(I), and 15 U.S.C. 78q-1(b)(4)(B).
\33\ 17 CFR 240.17Ad-22(e)(18)(i), 17 CFR 240.17Ad-
22(e)(18)(ii), 17 CFR 240.17Ad-22(e)(18)(iii), 17 CFR 240.17Ad-
22(e)(18)(iv)(A), 17 CFR 240.17Ad-22(e)(18)(iv)(B), and 17 CFR
240.17Ad-22(e)(23)(ii).
\34\ 17 CFR 240.19b-4(g).
\35\ Section 19(b)(2) of the Exchange Act grants to 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 Acts Amendments of 1975, Senate Comm.
on Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st
Sess. 30 (1975).
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The Commission asks that commenters address the sufficiency of
FICC's statements in support of the Proposed Rule Change, which are set
forth in the Notice of Filing \36\ in addition to any other comments
they may wish to submit about the Proposed Rule Change.
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\36\ See Notice of Filing, supra note 4.
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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#7e0c0b121b531d1113131b100a0d3e0d1b1d50191108"><span class="__cf_email__" data-cfemail="641611080149070b0909010a1017241701074a030b12">[email protected]</span></a>. Please include
file number SR-FICC-2024-009 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-FICC-2024-009. 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 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 such filing also will be available for
inspection and copying at the principal office of FICC and on FICC's
website (<a href="http://www.dtcc.com/legal/sec-rule-filings">www.dtcc.com/legal/sec-rule-filings</a>).
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-FICC-2024-009 and
should be submitted on or before October 23, 2024. Rebuttal comments
should be submitted by November 6, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\37\
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\37\ 17 CFR 200.30-3(a)(31).
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Vanessa A. Countryman,
Secretary.
[FR Doc. 2024-22560 Filed 10-1-24; 8:45 am]
BILLING CODE 8011-01-P
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