Notice2021-28572
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Amend the Opening Auction Process Provided Under Rule 11.23(b)(2)(B)
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
January 5, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 3 (Wednesday, January 5, 2022)</title>
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[Federal Register Volume 87, Number 3 (Wednesday, January 5, 2022)]
[Notices]
[Pages 532-535]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-28572]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93888; SR-CboeBZX-2021-086]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To Amend the Opening Auction Process
Provided Under Rule 11.23(b)(2)(B)
December 30, 2021.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on December 21, 2021, Cboe BZX Exchange, Inc. (the ``Exchange'' or
``BZX'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes a rule change to amend the Opening Auction
process provided under Rule 11.23(b)(2)(B) to better align the Opening
Auction Process with current market conditions, and, where certain
market conditions are not optimal, to delay the Opening Auction from
occurring until those market conditions have improved.
The text of the proposed rule change is also available on the
Exchange's website (<a href="http://markets.cboe.com/us/equities/regulation/rule_filings/bzx/">http://markets.cboe.com/us/equities/regulation/rule_filings/bzx/</a>), at the Exchange's Office of the Secretary, 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 the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend Rule 11.23(b)(2)(B) to make the
Opening Auction process more dynamic by, under certain circumstances
delaying the Opening Auction in order to incorporate additional
information into the determination of the Opening Auction price.
Specifically, as proposed the Rule would provide that when there is no
Valid NBBO \3\ in a BZX-listed security and there is an Indicative
Price \4\ that is not within the Collar Price Range,\5\ the Opening
Auction will be delayed until there is a Valid NBBO or the delay period
has lapsed, as further described below. The Exchange believes that the
proposal will make the Opening Auction price in less liquid securities
more representative of current market conditions making the Opening
Auction process a more meaningful price formation event in such BZX-
listed securities.
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\3\ As provided in Rule 11.23(a)(23), an NBBO is a Valid NBBO
where: (i) There is both a NBB and NBO for the security; (ii) the
NBBO is not crossed; and (iii) the midpoint of the NBBO is less than
the Maximum Percentage away from both the NBB and the NBO. See
Exchange Rule 11.23(a)(23).
\4\ The term ``Indicative Price'' shall mean the price at which
the most shares from the Auction Book and the Continuous Book would
match. In the event of a volume based tie at multiple price levels,
the Indicative Price will be the price which results in the minimum
total imbalance. In the event of a volume based tie and a tie in
minimum total imbalance at multiple price levels, the Indicative
Price will be the price closest to the Volume Based Tie Breaker. See
Exchange Rule 11.23(a)(10).
\5\ See Exchange Rule 11.23(a)(6).
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Background
Rule 11.23(b)(2)(B) sets forth the process by which the BZX
Official Opening Price \6\ is determined for BZX-listed securities
during the Opening Auction Process. Specifically, as provided in Rule
11.23(b)(2)(B), the Opening Auction price will be the price level
within the Collar Price Range that maximizes the number of shares
executed between the Continuous Book \7\ and Auction Book \8\ in the
Opening Auction. In the event of a volume based tie at multiple price
levels, the Opening Auction price will be the price which results in
the minimum total imbalance. In the event of a volume based tie and a
tie in minimum total imbalance at multiple price levels, the Opening
Auction price will be the price closest to the Volume Based Tie
Breaker.\9\
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\6\ See Exchange Rule 11.23(a)(5).
\7\ See Exchange Rule 11.23(a)(7).
\8\ See Exchange Rule 11.23(a)(1).
\9\ The Volume Based Tie Breaker is the midpoint of the NBBO for
a particular security where the NBBO is a Valid NBBO. Where the NBBO
is not a Valid NBBO, the price of the FLSET is used as the Volume
Based Tie Breaker, which for the Opening Auction process is the
previous BZX Official Closing Price. See Exchange Rule 11.23(a)(23).
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The Volume Based Tie Breaker for an Opening Auction will be the
midpoint of the NBBO where there is a Valid NBBO. Where there is no
Valid NBBO, the FLSET will be used as the Volume Based Tie Breaker.
Because the FLSET is typically based on the most recent execution in a
security during Regular Trading Hours, its value may be significantly
away from the Indicative Price at the time of the Opening Auction
process, especially in more thinly traded securities. As a result, the
Exchange has observed instances where auction eligible orders priced
in-line with the Indicative Price were not executed in the Opening
Auction because they were outside the Collar Price Range established
using the FLSET. Based on analysis by the Exchange and feedback from
market participants, certain of these instances resulted in orders not
receiving executions in the Opening Auction that would have otherwise
occurred at prices that would have been acceptable to both parties to
the execution. To illustrate this point, the Exchange presents the
following example: Consider a security with a prevailing NBBO at
9:30:00 a.m. of $27.10 x $29.54 and an Indicative Price of $27.90.
Because the midpoint of the NBBO (i.e., $28.32) is more than the
Maximum Percentage away from both the NBB and NBO, the NBBO is not a
Valid NBBO. Accordingly, the FLSET would be used as the Volume Based
Tie Breaker, which would by definition be the BZX Official Closing
Price from the previous business day. For purposes of this example,
that price is $26.52. Using the FLSET as the Collar Midpoint, the
Collar Price Range would be $25.19 x $27.85. Because the Indicative
Price is outside of the Collar Price Range, the auction would occur at
the upper most price that is included in the Collar Price Range (i.e.,
$27.85) even though more shares could have executed at $27.90. Because
the Opening Auction was forced into the Collar Price Range and occurred
at $27.85, a contingent of auction eligible orders that would have
executed at $27.90 that were priced
[[Page 533]]
equally to or more aggressive than the Indicative Price and within the
NBBO (i.e., sell orders priced between $27.86 and $27.90) would be
canceled without execution.\10\
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\10\ See Exchange Rule 11.23(b)(3)(C).
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Proposal
Based on the scenario described above, the Exchange is proposing to
amend its Opening Auction process such that rather than immediately
forcing the Opening Auction to occur at either the lowest or highest
end of the Collar Price Range and cancelling auction eligible orders
that were willing to execute at the Indicative Price but outside of the
Collar Price Range, the System would instead wait for the first of a
Valid NBBO, the Indicative Price to be within the Collar Price Range,
or the passage of a certain amount of time before initiating the
Opening Auction process, as described in additional detail below.
Proposed Rule 11.23(b)(2)(B)(i) would set forth the ``Standard Opening
Process'', which mirrors the current process described in Rule
11.23(b)(2)(B). Proposed Rule 11.23(b)(2)(B)(ii) would provide that if
there is no Valid NBBO and the Indicative Price is within the Collar
Price Range, the Opening Auction price will be established pursuant to
the Standard Opening Process. Proposed Rule 11.23(b)(2)(B)(iii) would
delay and set forth an alternative Opening Auction Process in the event
there is no Valid NBBO and the Indicative Price is not within the
Collar Price Range. The proposal is designed to prevent the
cancellation of auction eligible orders priced equally or more
aggressively than the Indicative Price which the Exchange believes will
facilitate the presence of sufficient liquidity and information to make
the Opening Auction a meaningful price formation event in BZX-listed
securities.
Proposed Rule 11.23(b)(2)(B)(iii) would provide that the Opening
Auction price will be delayed as set forth in subparagraphs (a) and (b)
as follows:
(a) If after the one-second delay there is a Valid NBBO or the
Indicative Price is within the Collar Price Range, the Opening Auction
price will be established pursuant to the Standard Opening Auction
Process. If there is no Valid NBBO and the Indicative Price is not
within the Collar Price Range after the one-second delay, the Opening
Auction will be delayed by one additional second, at which point if
there is a Valid NBBO or the Indicative Price is within the Collar
Price Range, the Opening Auction price will be established pursuant to
the Standard Opening Process. If after the additional one-second delay
there is a Valid NBBO or the Indicative Price is not within the Collar
Price Range, the process described in this paragraph (a) will continue
to be applied in one-second increments until either the Opening Auction
occurs or until five seconds has lapsed (i.e., 9:30:05 a.m.).
(b) If the Opening Auction has not occurred by 9:30:05, the System
will widen the Collar Price Range in the direction of the auction
imbalance by 5% of the Final Last Sale Eligible Trade as of 9:30:05
a.m. (the ``Widening Amount''). If the Indicative Price is within the
widened Collar Price Range, the Opening Auction price will be
established pursuant to the Standard Opening Auction Process. If the
Indicative Price is not within the widened Collar Price Range, the
Opening Auction will be further delayed, as discussed below.
Proposed Rules 11.23(b)(2)(B)(iii)(b)(1) through (4) would set
forth the delay of the Opening Auction if no auction has occurred
between 9:30:05 and 9:34:30. Specifically, the proposed Rules would
provide:
(1) The System will check to see whether the Indicative Price is
inside the widened Collar Price Range every second between 9:30:05 and
9:30:30 a.m. If an Indicative Price is inside the widened Collar Price
Range during a check, the Opening Auction price will be established
pursuant to the Standard Opening Auction Process.
(2) If by 9:30:30 a.m. the Indicative Price is not within the
widened Collar Price Range, the Collar Price Range will again widen by
the Widening Amount. The System will check to see whether the
Indicative Price is inside the widened Collar Price Range every second
between 9:30:30 and 9:31:30 a.m. If an Indicative Price is inside the
widened Collar Price Range during a check, the Opening Auction price
will be established pursuant to the Standard Opening Auction Process.
(3) If by 9:31:30 a.m. the Indicative Price is not within the
widened Collar Price Range, the System will check to see whether the
Indicative Price is inside the widened Collar Price Range every second
between 9:31:30 and 9:34:30 a.m. If an Indicative Price is inside the
widened Collar Price Range during a check, the Opening Auction price
will be established pursuant to the Standard Opening Auction Process.
Unless the Opening Auction has occurred, the Collar Price Range will
widen in the direction of the auction imbalance by the Widening Amount
each minute from 9:31:30 to 9:34:30.
(4) If no Opening Auction has occurred by 9:34:30 a.m., the Opening
Auction will occur pursuant to the Standard Opening Auction Process
using the expanded Collar Price Range as of 9:34:30.
The Exchange also proposes to move the last two sentences of
existing Rule 11.23(b)(2)(B) to proposed Rules 11.23(b)(2)(B)(iv) and
(v), respectively. Specifically, proposed Rule 11.23(b)(2)(B)(iv) would
provide that the Opening Auction Price will be the BZX Official Opening
Price. Proposed Rule 11.23(b)(2)(B)(v) would provide that in the event
that there is no Opening Auction for an issue, the BZX Official Opening
Price will be the price of the FLSET.
Based on the above proposed amendments, the Exchange proposes to
amend Rules 11.23(b)(1)(A) and (B) to reflect that the Opening Auction
may occur at a time other than 9:30 a.m. Specifically, the Exchange
proposes to amend paragraph (A) to provide the following: Users may
submit orders to the Exchange as set forth in Rule 11.1. Any Eligible
Auction Orders \11\ designated for the Opening Auction will be queued
for participation in the Opening Auction. Users may submit limit-on-
open (``LOO'') and market-on-open (``MOO'') orders until 9:28 a.m., at
which point any additional LOO and MOO orders submitted to the Exchange
will be rejected. Regular Hours Only \12\ (``RHO'') market orders will
also be rejected from 9:28 a.m. until the Opening Auction has
concluded. Users may submit late-limit-on-open \13\ (``LLOO'') orders
from 9:28 a.m. until the Opening Auction has concluded. Any LLOO orders
submitted before 9:28 a.m. or after the Opening Auction has concluded
will be rejected. RHO limit orders submitted from 9:28 a.m. until the
Opening Auction has concluded will be treated as LLOO orders.
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\11\ See Exchange Rule 11.23(a)(8).
\12\ See Exchange Rule 11.9(b)(7).
\13\ See Exchange Rule 11.23(a)(12).
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The Exchange proposes to amend Rule 11.23(b)(1)(B) to provide that
Eligible Auction Orders designated for the Opening Auction may not be
cancelled or modified from 9:28 a.m. until the Opening Auction has
concluded except that RHO limit orders designated for the Opening
Auction may be modified, but not cancelled, from 9:28 a.m. until the
time the Opening Auction has concluded. Any such RHO limit orders
modified from 9:28 a.m. until the Opening Auction has
[[Page 534]]
concluded will be treated as LLOO orders.
Applying the example discussed above, the Opening Auction would be
delayed at 9:30:00 as there was no Valid NBBO and the Indicative Price
was outside of the Collar Price Range. Under the proposal, the Opening
Auction would be delayed until either (1) the NBBO becomes a Valid
NBBO, (2) the Indicative Price is within the Collar Price Range (i.e.,
if the Opening Auction occurred between 9:30:01 and 9:30:05) or within
the widened Collar Price Range (i.e., if the Opening Auction occurred
between 9:30:06 and 9:34:30), or (3) the delay period of four minutes
and 30 seconds lapsed. While the proposal does not guarantee that
certain order priced equally or more aggressive to the Indicative Price
will execute in the Opening Auction, it provides for additional time
for the market to develop at the beginning of the trading day before
conducting the Opening Auction.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act.\14\ Specifically, the proposed change is
consistent with Section 6(b)(5) of the Act,\15\ because it would
promote just and equitable principles of trade, remove impediments to
and perfect the mechanism of a free and open market and a national
market system, and, in general, protect investors and the public
interest. Generally, the Exchange believes that the proposed changes
will improve the price discovery process in the Opening Auction for
securities listed on the Exchange along with additional benefits set
forth below.
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\14\ 15 U.S.C. 78f(b).
\15\ 15 U.S.C. 78f(b)(5).
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First, the Exchange believes proposed Rules 11.23(b)(2)(B)(i) and
(ii) will contribute to the protection of investors and the public
interest by memorializing the circumstances under which the Exchange
will continue to operate the Opening Auction in the same way that it
does today. Second, the Exchange believes proposed Rule
11.23(b)(2)(B)(iii) would promote just and equitable principles of
trade, remove impediments to and perfect the mechanism of a free and
open market and a national market system and, in general, protect
investors and the public interest. The proposal is designed to increase
the likelihood that auction eligible orders that are priced equally or
more aggressive than the Indicative Value of the security are able to
participate in the Opening Auction instead of being canceled because
they are priced outside the Collar Price Range established using the
FLSET. As stated above, current Rule 11.23(b)(2)(B) provides that in
the event there is no Valid NBBO, the FLSET will be used as the Volume
Based Tie Breaker and basis for calculating the Collar Price Range.
Because the current Opening Auction process occurs at 9:30:00 a.m.,
such a Collar Price Range is based on an FLSET that may not have
occurred recently or may not otherwise be reflective of current market
conditions. As a result, the Exchange has observed instances where
auction eligible orders priced equally or more aggressive than the
Indicative Price were canceled without execution because they were
outside the Collar Price Range established using the FLSET. The
Exchange believes that the proposed approach would maximize the
execution of auction eligible orders priced equally or more aggressive
than the Indicative Price of the security while still [sic]. As such,
the Exchange believes that the proposal would promote just and
equitable principles of trade, remove impediments to and perfect the
mechanism of a free and open market and a national market system and,
in general, protect investors and the public interest by allowing the
execution of orders in the Opening Auction with limit prices reflect
current market conditions.
The Exchange notes that the concept of delaying an auction and
widening the Collar Price Range is similar to the Twelfth Amendment of
the Plan to Address Extraordinary Market Volatility \16\ (the
``Plan''). Specifically, Amendment 12 was created to improve re-
openings following a trading pause,\17\ with an eye towards carefully
balancing halt auction price quality and the speed with which
continuous trading can be resumed. Amendment 12 provided that auction
halt periods would be extended if either the auction price at which the
most shares would be traded is outside the range of the pre-defined
price threshold collars (the ``price threshold collars'') or there is a
market order share imbalance. Further, Amendment 12 provided that the
price threshold collars would be widened in the event that the
auction's halt period is extended. In its approval of Amendment 12, the
Commission stated that it is appropriate in the public interest, for
the protection of investors and the maintenance of a fair and orderly
market to provide that a trading pause continue until the primary
listing exchange has reopened trading using its established reopening
procedures, even if such reopening is more than 10 minutes after the
beginning of a trading pause, and to require that trading centers may
not resume trading in an NMS Stock following a trading pause without
Price Bands in such NMS Stock. The Commission believes that these two
provisions together support a more standardized process for reopening
trading after a trading pause has been declared. Further, these
provisions ensure that trading would not resume after a trading pause
without Price Bands. Given the similarity of the proposal to Amendment
12, the Exchange believes the proposal is appropriate, in the public
interest, for the protection of investors and the maintenance of a fair
and orderly market.
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\16\ See Securities and Exchange Act no. 79410 (November 28,
2016) 81 FR 87114 (December 2, 2016) (Notice of Filing of the
Twelfth Amendment to the National Market System Plan To Address
Extraordinary Market Volatility (``Amendment 12'')).
\17\ A ``trading pause'' refers to a function of the Limit Up-
Limit Down (``LULD'') mechanism provided under the Plan.
Specifically, the Plan sets for procedures that provide for market-
wide LULD requirements that prevent trades in individual NMS stocks
from occurring outside of the specified price bands and provides for
trading pauses to accommodate more fundamental price moves.
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Finally, the Exchange believes its proposed clarifications to Rules
11.23(b)(1)(A) and (B) to reflect that the Opening Auction may occur at
a time other than 9:30 a.m. will contribute to the protection of
investors and the public interest. Specifically, the Exchange believes
the proposed amendments to Rules 11.23(b)(1)(A) and (B) will add
clarity, transparency and internal consistency to Exchange rules making
them easier to navigate, in light of the other proposed Rule changes
described herein.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. To the contrary, allowing the
Exchange to make the above proposed modifications will allow the
Exchange to better compete with other exchanges as a listing venue by
improving the Exchange's auction process by allowing more executions to
occur at more reasonable prices that are based on the current value of
the security. As mentioned above, the Exchange has received feedback
from market participants regarding the issue under the current process,
and the proposed amendments will both address this feedback and improve
the Exchange's auction process, allowing it
[[Page 535]]
to better compete as both a listing and execution venue.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will:
A. By order approve or disapprove such proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#f98b8c959cd49a9694949c978d8ab98a9c9ad79e968f"><span class="__cf_email__" data-cfemail="9ceee9f0f9b1fff3f1f1f9f2e8efdceff9ffb2fbf3ea">[email protected]</span></a>. Please include
File Number SR-CboeBZX-2021-086 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-CboeBZX-2021-086. 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="http://www.sec.gov/rules/sro.shtml">http://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 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly.
All submissions should refer to File Number SR-CboeBZX-2021-086 and
should be submitted on or before January 26, 2022.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\18\
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\18\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2021-28572 Filed 1-4-22; 8:45 am]
BILLING CODE 8011-01-P
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