Document ID: SEC-2015-0487-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Options Clearing Corp.
Posted Date: 2015-03-20T04:00Z

[Federal Register Volume 80, Number 54 (Friday, March 20, 2015)]
[Notices]
[Pages 15042-15045]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2015-06359]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74511; File No. SR-OCC-2015-006]

Self-Regulatory Organizations; the Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change Concerning the Provision of 
Clearance and Settlement Services for Energy Futures and Options on 
Energy Futures

March 16, 2015.
    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 March 2, 2015, The Options Clearing Corporation (``OCC'') filed with 
the Securities and Exchange Commission (``Commission'') the proposed 
rule change as described in Items I, II, and III below, which Items 
have been prepared primarily by OCC. 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. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The purpose of this proposed rule change by The Options Clearing 
Corporation (``OCC'') is to provide clearance and settlement services 
for energy futures contracts (``Energy Futures'') and options on Energy 
Futures contracts. In order to do so, OCC is proposing to add new risk 
models to its STANS methodology as

[[Page 15043]]

well as to add a new ``Schedule C'' to the Agreement for Clearing and 
Settlement Services between OCC and NASDAQ Futures, Inc. (``NFX'') (the 
``Clearing Agreement'').\3\
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    \3\ The Clearing Agreement is the subject of a pending proposed 
rule change by filed OCC (SR-OCC-2015-03). This proposed rule change 
has not yet been published by the Commission. SR-OCC-2015-03 is 
publically available at: http://www.theocc.com/components/docs/legal/rules_and_bylaws/sr_occ_15_03.pdf. (The staff notes that the 
rule change was filed by the Commission on March 4, 2015 and 
subsequently published in the Federal Register. See Securities 
Exchange Act Release No. 74432 (March 4, 2015), 80 FR 12652 (March 
10, 2015)).
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, OCC 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. OCC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of these 
statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

1. Purpose
    The purpose of this proposed rule change is to provide clearance 
and settlement services for Energy Futures and options on Energy 
Futures. As described more fully below, OCC is proposing to add new 
risk models to its STANS methodology that are designed to risk manage 
Energy Futures.\4\ The STANS methodology already accommodates the 
margining of futures and futures options and, after adopting the models 
described in this proposed rule change, Energy Futures would be risk 
managed using the same methodology as futures products currently 
cleared and settled by OCC.\5\ In addition, OCC is proposing to add a 
new Schedule C to the Clearing Agreement since Energy Futures and 
options on Energy Futures are not types of contracts for which OCC has 
previously agreed to provide clearance and settlement services to NFX.
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    \4\ OCC believes that its existing risk models for options on 
futures contracts would appropriately manage risk for options on 
Energy Futures when used in conjunction with the proposed new risk 
models for Energy Futures.
    \5\ OCC would compute initial margin requirements for segregated 
futures accounts through the Standard Portfolio Analysis of Risk 
(``SPAN''[supreg]) margin calculation system without further 
modification, subject to OCC's collection of enhanced margin to be 
deposited in the segregated futures account in the event that the 
margin requirement as calculated under STANS would exceed the 
requirement calculated under SPAN. See Securities Exchange Act 
Release No. 72331 (June 5, 2014), 79 FR 33607 (June 11, 2014) (SR-
OCC-2014-13). See also Securities Exchange Act Release No. 74268 
(February 12, 2015), 80 FR 8917 (February 19, 2015) (SR-OCC-2014-
24). This rule change has been approved by the Commission.
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Energy Futures Background
    OCC is proposing to clear and settle 25 Energy Futures and 3 
futures options that are proposed to be traded on NFX.\6\ These 25 
Energy Futures include 9 futures contracts on petrol and natural gas 
products, 3 of which will have related options contracts, and 16 
futures contracts on electricity. The proposed Energy Futures contracts 
are all cash-settled futures products, and the three options on futures 
contracts (as described below) will settle into the underlying Energy 
Futures contract. All of the Energy Futures contracts are ``look-
alike'' products to futures products already traded on U.S. futures 
exchanges and cleared by other Derivatives Clearing Organizations 
(``DCOs'').\7\
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    \6\ Energy Futures and options on Energy Futures would trade 
during overnight trading sessions. See Securities Exchange Act 
Release No. 74241 (February 10, 2015), 80 FR 8383 (February 17, 
2015) SR-OCC-2014-812.
    \7\ More specifically, Energy Futures are look-alike products to 
futures products that are currently traded on the New York 
Mercantile Exchange, Inc. and ICE Futures, U.S., and cleared by the 
Chicago Mercantile Exchange Inc. and ICE Clear U.S., Inc., 
respectively.
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Proposed Petrol and Natural Gas Futures Products
    NFX will list petrol and natural gas futures contracts and options 
on petrol futures contracts. The futures are based on a variety of 
refined oil fuels and natural gasses that are commonly used for hedging 
market participants' portfolios. Specifically, NFX will list the 
following cash-settled petrol and natural gas futures contracts: NFX 
Brent Crude Financial Futures (BFQ), NFX Gasoil Financial Futures 
(GOQ), NFX Heating Oil Financial Futures (HOQ), NFX WTI Crude Oil 
Financial Futures (CLQ), NFX RBOB Gasoline Financial Futures (RBQ), NFX 
Henry Hub Natural Gas Financial Futures--10,000 (HHQ), NFX Henry Hub 
Natural Gas Financial Futures--2,500 (NNQ), NFX Henry Hub Natural Gas 
Penultimate Financial Futures--2,500 (NPQ) and NFX Henry Hub Natural 
Gas Penultimate Financial Futures--10,000 (HUQ).
    Further, NFX will list options on NFX WTI Crude Financial Futures 
(LOQ), NFX Brent Crude Financial Futures (BCQ) and the NFX Henry Hub 
Penultimate Financial Futures (LNQ) that settle directly into the 
referenced futures contract.
Proposed Electricity Futures Products
    NFX will also list electricity futures. These electricity futures 
are based on electricity prices at different hubs and smaller nodes 
from across the United States reflecting different power distribution 
grids and circuits and are look-alike products to products traded on 
ICE Futures, U.S. and cleared by ICE Clear U.S., Inc. For each of these 
nodes, there is a ``peak'' and ``off-peak'' future representing prices 
at time periods in the day when electricity usage is high compared to 
when the demand on the grid is lower. The electricity futures NFX 
selected for listing are the most popular nodes and hubs within the 
electricity futures market. More specifically, NFX will list the 
following electricity contracts, to be settled on final settlement 
prices based on an average regional transmission organization, 
independent system operator (``ISO'') published real-time or day-ahead 
locational marginal prices (``LMPs'') \8\ for a pre-determined set of 
peak or off-peak hours for a contract month:
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    \8\ Locational marginal pricing reflects the value of the energy 
at the specific location and time it is delivered.
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     NFX ISO-NE Massachusetts Hub Day-Ahead Off-Peak Financial 
Future (NOPQ), settling on final settlement prices based on average 
day-ahead hourly off-peak LMPs for the contract month for the 
Massachusetts Hub.
     NFX ISO-NE Massachusetts Hub Day-Ahead Peak Financial 
Futures (NEPQ), settling on final settlement prices based on average 
day-ahead hourly peak LMPs for the contract month for the Massachusetts 
Hub.
     NFX MISO Indiana Hub Real-Time Peak Financial Futures 
(CINQ), settling on final settlement prices based on average real-time 
hourly peak LMPs for the contract month for the Indiana Hub as 
published by the Midcontinent Independent System Operator, Inc. 
(``MISO'').
     NFX MISO Indiana Hub Real-Time Off-Peak Financial Futures 
(CPOQ), settling on final settlement prices based on average real-time 
hourly off-peak LMPs for the contract month for the Indiana Hub as 
published by MISO.
     NFX PJM AEP Dayton Hub Real-Time Peak Financial Futures 
(MSOQ), settling on final settlement prices based on average real-time 
hourly peak LMPs for the contract month for the AEP Dayton Hub.
     NFX PJM AEP Dayton Hub Real-Time Off-Peak Financial 
Futures (AODQ), settling on final settlement prices based on average 
real-time hourly

[[Page 15044]]

off-peak LMPs for the contract month for the AEP Dayton Hub.
     NFX PJM Northern Illinois Hub Real-Time Peak Financial 
Futures (PNLQ), settling on final settlement prices based on average 
real-time hourly peak LMPs for the contract month for the Northern 
Illinois Hub.
     NFX PJM Northern Illinois Hub Real-Time Off-Peak Financial 
Futures (NIOQ), settling on final settlement prices based on average 
real-time hourly off-peak LMPs for the contract month for the Northern 
Illinois Hub.
     NFX PJM Western Hub Day-Ahead Off-Peak Financial Futures 
(PJDQ), settling on final settlement prices based on average day-ahead 
hourly off-peak LMPs for the contract month for the Western Hub.
     NFX PJM Western Hub Day-Ahead Peak Financial Futures 
(PJCQ), settling on final settlement prices based on average day-ahead 
hourly peak LMPs for the contract month for the Western Hub.
     NFX PJM Western Hub Real-Time Off-Peak Financial Futures 
(OPJQ), settling on final settlement prices based on average real-time 
hourly off-peak LMPs for the contract month for the Western Hub.
     NFX PJM Western Hub Real-Time Peak Financial Future 
(PJMQ), settling on final settlement prices based on average real-time 
hourly peak LMPs for the contract month for the Western Hub.
     NFX CAISO NP-15 Hub Day-Ahead Off-Peak Financial Futures 
(ONPQ), settling on final settlement prices based on average day-ahead 
hourly off-peak LMPs for the contract month for the NP-15 Hub.
     NFX CAISO NP-15 Hub Day-Ahead Peak Financial Futures 
(NPMQ), settling on final settlement prices based on average day-ahead 
hourly peak LMPs for the contract month for the NP-15 Hub.
     NFX CAISO SP-15 Hub Day-Ahead Off-Peak Financial Futures 
(OFPQ), settling on final settlement prices based on average day-ahead 
hourly off-peak LMPs for the contract month for the SP-15 Hub.
     NFX CAISO SP-15 Hub Day-Ahead Peak Financial Futures 
(SPMQ), settling on final settlement prices based on average day-ahead 
hourly peak LMPs for the contract month for the SP-15 Hub.
Risk Model Changes
Background
    The proposed Energy Futures are look-alike products to energy 
futures traded on other futures exchanges and cleared by other DCOs. 
Accordingly, there is a significant amount of historical data and 
academic literature concerning risk models for energy futures, as 
discussed below. OCC has used such data and literature in the 
development of its risk models for Energy Futures.
    Based on such data and literature, OCC has identified two 
characteristics specific to energy futures (compared to futures 
contracts already cleared, settled and risk managed by OCC) for which 
new risk models need to be added to the STANS methodology: \9\
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    \9\ In developing its risk models for Energy Futures, OCC also 
considered a third characteristic, namely that electricity markets 
are known to be geographically segmented, which can cause abrupt and 
unanticipated changes in spot prices. However, after reviewing 
relevant academic literature and performing internal testing, OCC 
determined that adjusting its futures risk models to account for 
changes in the spot price of electricity was not appropriate. See 
Kholopova, M. (2006) ``Estimating a two-factor model for the forward 
curve of electricity,'' Ph.D. dissertation.
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     Energy futures prices are known to be more volatile as 
contracts approach delivery because of the convergence with cash-market 
prices and the potential for real-life trading and delivery 
complications of the underlying commodity. This phenomenon is known as 
the ``Samuelson effect,'' \10\ and
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    \10\ See Samuelson, Paul A., ``Proof that Properly Anticipated 
Prices Fluctuate Randomly,'' Industrial Management Review, Vol. 6 
(1965). No other futures contracts for which OCC provides clearance 
and settlement services exhibit the Samuelson effect.
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     The price volatility of certain energy futures display a 
seasonal pattern (a/k/a ``seasonality'').

In order to address these characteristics, OCC has designed multi-
factor risk modeling capabilities that can risk model based on up to 
three factors: A short-run factor, a seasonal factor and a long-run 
factor. The short-run factor is designed to account for the Samuelson 
effect, which becomes more pronounced the closer the contract is to 
maturity (i.e., delivery). The seasonal factor accounts for Energy 
Futures contracts that display volatility in a seasonal pattern, and 
the long-run factor accounts for the risk of a given Energy Future not 
addressed by either the short-run factor or the seasonal factor.
    OCC's multi-factor models can be further categorized as either a 
two-factor model or three-factor model. The two factor model consists 
of a short-run and long-run factor, while the three-factor model 
consists of a short-run factor, long-run factor and seasonality factor.
Two-Factor Model
    OCC plans to use a two-factor risk model to compute theoretical 
prices for NFX Brent Crude Financial Futures contracts and NFX WTI 
Crude Oil Financial Futures contracts since such futures do not exhibit 
seasonality.\11\ The two-factor risk model will derive a given Energy 
Future's price based on a long-run factor and a short-run factor. The 
long-run factor component captures changes to the equilibrium price 
(i.e., the prevailing market price at a point in time) of a given 
Energy Future based on factors such as expectations of the exhaustion 
of existing supply, improving technology for production, the discovery 
of additional supply of the commodity, inflation and political and 
regulatory effects. Based on historical data, OCC assumes that such 
long-run factors cause the equilibrium price for a given Energy Future 
to evolve according to a stochastic process that accounts for 
asymmetric skewness and excess kurtosis.\12\ The short-run component 
captures short-run changes in demand or supply due to real-life factors 
such as variation in the weather or intermittent supply disruptions as 
well as increased volatility (i.e., the Samuelson effect).\13\ The 
short-run component of the model is mean reverting; therefore, in the 
absence of such short-term changes in demand or supply the long-run 
factor should determine the price for a given Energy Future. 
Additionally, the short-run is less noticeable as the tenor of the 
Energy Futures contract increases.
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    \11\ See Schwartz, E. and J. Smith (2000) ``Short-term 
variations and long-term dynamics in commodity prices,'' Management 
Science, vol. 46, pp. 893-911. The supply of Brent Crude Oil and WTI 
Crude Oil is not affected by seasonal variation in demand since 
there are low-cost transportation methods for Brent Crude Oil and 
WTI Crude Oil as well as the ability to store Brent Crude Oil and 
WTI Crude Oil.
    \12\ The model assumes that past price information is already 
incorporated into the current price and the next price movement is 
conditionally independent of past price movements. Additionally, the 
long-run factor accounts for ``fat tail'' events.
    \13\ This is often observed as shorter dated futures contracts 
exhibit greater volatility than longer dated futures contracts.
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Three-Factor Model
    OCC plans to use a three-factor risk model in order to compute 
theoretical prices for the remainder of the Energy Futures.\14\ The 
three-factor model uses the same long-run and short-fun factor 
components as the two-factor model and adds a seasonality factor. Based 
on historical data, all Energy Futures except for Energy Futures on 
Brent Crude Oil and WTI Crude Oil experience seasonality.\15\ In order 
to address seasonality, OCC would employ

[[Page 15045]]

a trigonometric function,\16\ which captures price dynamics in 
different seasons.
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    \14\ OCC's proposed model is based upon recent academic 
literature on energy futures. See Mirantes, A., J. Poblacion and G. 
Serna (2012) ``The stochastic seasonal behavior of natural gas 
prices,'' European Financial Management, vol. 18, pp. 410-443.
    \15\ This is due to the lack of low-cost transportation and 
limited, or no, ability to store the commodity.
    \16\ See note 13 supra.
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    Based on the above, OCC believes that the proposed enhancements to 
STANS have been appropriately designed to support the clearance and 
settlement of Energy Futures, which belief is supported by model back 
testing results. Moreover, energy futures are not new or novel 
contracts, and the clearance and settlement of Energy Futures does not 
present material risk to OCC.\17\
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    \17\ Cleared futures contracts account for less than two percent 
of OCC's total overall volume and, in 2011, OCC cleared 1,388 
contracts traded on NFX. In 2012, OCC cleared 518,360 contracts 
traded on NFX (NFX did not have any cleared futures contract volume 
in 2013 and 2014). By way of reference, OCC's average daily cleared 
contract volume in through February 19, 2015, is 17 million 
contracts.
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Schedule C to the Clearing Agreement
    OCC also proposes to add a Schedule C to the Clearing Agreement in 
order to support the clearance and settlement of Energy Futures and 
options on Energy Futures. OCC performs clearance and settlement 
services for NFX pursuant to the Clearing Agreement. Pursuant to the 
terms of the Clearing Agreement, OCC has agreed to clear the specific 
types of contracts enumerated in the Clearing Agreement and may agree 
to clear and settle additional types of contracts through the execution 
by both parties of a new Schedule C to the Clearing Agreement. Energy 
Futures and options on Energy Futures are not enumerated in the 
Clearing Agreement, nor do they fall under an existing Schedule C to 
the Clearing Agreement. Therefore, a new Schedule C providing for the 
clearance and settlement of Energy Futures and options on Energy 
Futures is required. A copy of such Schedule C is attached hereto as 
Exhibit 3.
2. Statutory Basis
    OCC believes that the proposed rule change is consistent with 
Section 17A(b)(3)(F) of the Act \18\ because it will assure the 
safeguarding of securities and funds which are in the custody and 
control of OCC. OCC believes that the proposed rule change assures the 
safeguarding of securities and funds in the custody and control of OCC 
because it would permit OCC to risk manage Energy Futures through 
appropriate risk models as described above. Such risk models would 
reduce the risk that clearing member margin assets would be 
insufficient should OCC need to use such assets to close-out the 
positions of a defaulted clearing member. In addition, the proposed 
rule change is consistent with Rule 17Ad-22(b)(2) under the Act,\19\ 
because the proposed rule change would allow OCC to implement risk-
based models and parameters, as described above, to set margin 
requirements for clearing members who trade Energy Futures. The 
proposed rule change is not inconsistent with any existing OCC By-Laws 
or Rules, including any rules proposed to be amended.
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    \18\ 15 U.S.C. 78q-1(b)(3)(F).
    \19\ 17 CFR 240.17Ad-22(b)(2).
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(B) Clearing Agency's Statement on Burden on Competition

    OCC does not believe that the proposed rule change would impose a 
burden on competition.\20\ As described above, the proposed rule change 
concerns implementation of certain enhancements to OCC's risk models in 
order to facilitate the margining of clearing member positions in 
Energy Futures. OCC does not believe that these enhancements will 
affect the ability of clearing members or other market participants to 
clear Energy Futures or otherwise limit market participants' choices 
for selecting clearing services. In addition, the proposed rule change 
will uniformly affect all clearing members who trade Energy Futures.
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    \20\ 15 U.S.C. 78q-1(b)(3)(I).
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(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants or Others

    Written comments on the proposed rule change were not and are not 
intended to be solicited with respect to the proposed rule change and 
none have been received.

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 self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the 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

     Use the Commissions Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-OCC-2015-006 on the subject line.

Paper Comments

     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-OCC-2015-006. 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 Web site (http://www.sec.gov/rules/sro.shtml). 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 Web site viewing and 
printing in the Commission's Public Reference Section, 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 such filing also will be 
available for inspection and copying at the principal office of OCC and 
on OCC's Web site at http://www.theocc.com/components/docs/legal/rules_and_bylaws/sr_occ_15_006.pdf .
    All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly.
    All submissions should refer to File Number SR-OCC-2015-006 and 
should be submitted on or before April 10, 2015.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated Authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-06359 Filed 3-19-15; 8:45 am]
 BILLING CODE 8011-01-P