
[Federal Register Volume 75, Number 237 (Friday, December 10, 2010)]
[Notices]
[Pages 77024-77027]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-31102]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63444; File No. SR-NYSE-2010-74]


Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing of Proposed Rule Change To Create a Bond Trading 
License for Member Organizations and Establish Bonds Liquidity 
Providers as a New Market Class on NYSE Under a Pilot Program

December 6, 2010.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on November 23, 2010, New York Stock Exchange LLC (``NYSE'' 
or the ``Exchange'') 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 self-
regulatory organization. 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\ 15 U.S.C. 78a.
    \3\ 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 to establish a twelve-month pilot program to: 
(1) Create a bond trading license for member organizations that desire 
to trade only debt securities on the Exchange; and (2) establish a new 
class of NYSE market participants, ``Bonds Liquidity Providers'' 
(``BLPs''). The text of the proposed rule change is available at the 
Exchange, the Commission's Public Reference Room, and http://www.nyse.com.

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 self-regulatory organization 
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 those 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 parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    NYSE proposes a twelve-month pilot program to: (1) Adopt new Rule 
87 to create a bond trading license for member organizations that 
desire to trade only debt securities on the NYSE; and (2) adopt new 
Rule 88 to establish BLPs, a new class of debt market participants, and 
provide them with financial incentives for bringing liquidity to the 
Exchange's bond market. The purpose of the proposed rule change is to 
encourage market participants to bring additional liquidity to the 
Exchange's bond marketplace.

Background on the Current NYSE Bond Trading Platform

    The Exchange began trading bonds electronically in 1977 with the 
introduction of the Automated Bond System (``ABS''). In 2007, the 
Exchange retired the ABS system, moved the platform to its Archipelago 
technology, and replaced former Rule 86 (``Automated Bond System'') 
with new Rule 86 (``NYSE Bonds'').\4\ The Exchange also filed Rules 
1400 and 1401, expanding the number of debt issues that could be traded 
on the exchange. Bonds eligible to trade on the NYSE Bonds platform 
include any debt instrument that is listed on the NYSE and any 
corporate debt of a listed company of the Exchange.
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    \4\ See Securities Exchange Act Release No. 55496 (March 20, 
2007), 72 FR 14631 (March 28, 2007) (SR-NYSE-2006-37).
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    Despite these changes, the Exchange has failed to attract 
meaningful trading volume. The NYSE Bonds platform executes between 0 
and 20 trades per day, with an average sized trade of 20 bonds. 
Currently, there are no incentive programs in place to provide 
liquidity to NYSE Bonds. The Exchange believes that the pilot incentive 
programs proposed in this filing will attract providers to NYSE Bonds 
and create more liquidity and transparency in the retail corporate bond 
market.

Bond Trading License

    The Exchange proposes to establish a new bonds-only trading license 
to encourage more member organizations to trade debt securities on the 
NYSE.\5\ Currently, an approved member organization may obtain a 
trading license pursuant to Rule 300, which permits them to trade all 
debt and equity securities listed on the Exchange.

[[Page 77025]]

Under proposed Rule 87, a member organization that chooses to trade 
only bonds, or a new member organization who desires to trade only 
bonds, could apply for a bond trading license (``BTL'') under proposed 
Rule 87. A BTL would be available to any approved NYSE member 
organization. A BTL license would not be transferable and could not, in 
whole or in part, be transferred, assigned, sublicensed or leased. 
However, the holder of the BTL could, with the prior written consent of 
the Exchange, transfer a BTL to a qualified and approved member 
organization (i) that is an affiliate or (ii) that continues 
substantially the same business of such BTL holder without regard to 
the form of the transaction used to achieve such continuation, e.g., 
merger, sale of substantially all assets, reincorporation, 
reorganization or the like.
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    \5\ The NYSE intends to submit a separate fee filing to address 
the proposed bond trading license.
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Background on BLPs

    The Exchange also proposes to create a new class of market 
participant, BLPs, which would serve a function similar to the function 
served by Supplemental Liquidity Providers (``SLPs'') trading equity 
securities in the Exchange's New Market Model.\6\ The structure of the 
corporate bond market consists of thousands of bonds, with liquidity 
spread inconsistently across many issues. Under proposed Rule 88, the 
Exchange would provide incentives for quoting and adding liquidity to 
the bond market via the BLP program. Under a current pilot program, 
bond platform participants are only charged a graduated fee for 
liquidity taking transactions.\7\ Proposed Rule 88 seeks to provide an 
additional incentive in the form of a rebate to BLPs who provide 
liquidity to the Exchange's bond market. The Exchange believes that the 
rebate would encourage the additional utilization of, and interaction 
with, the NYSE and improve price discovery and liquidity and encourage 
competitive quotes and price improvement opportunities. These 
incentives should encourage BLPs to make more liquid and competitive 
markets.
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    \6\ See Securities Exchange Act Release No. 58877 (October 29, 
2008), 73 FR 65904 (November 5, 2008) (SR-NYSE-2008-108) 
(establishing SLP Pilot); Securities Exchange Act Release No. 58845 
(October 24, 2008), 73 FR 64379 (October 29, 2008) (SR-NYSE-2008-46) 
(establishing New Market Model Pilot); Securities Exchange Act 
Release No. 62814 (September 1, 2010), 75 FR 54671 (September 8, 
2010) (SR-NYSE-2010-61 (extending the Pilots until January 31, 
2011).
    \7\ See Securities Exchange Act Release No. 62455 (July 6, 
2010), 75 FR 40004 (July 13, 2010) (SR-NYSE-2010-51); see also 
Securities Exchange Act Release No. 57176 (January 18, 2008), 73 FR 
4929 (January 28, 2008) (SR-NYSE-2008-04). The pilot program, which 
is scheduled to expire in December 31, 2010, provides for the 
following transaction fee schedule: (1) When the liquidity taker 
purchases or sells from one to 10 bonds, the Exchange charges an 
execution fee of $0.50 per bond; (2) when the liquidity taker 
purchases or sells from 11 to 25 bonds, the Exchange charges an 
execution fee of $0.20 per bond, and (3) when the liquidity taker 
purchases or sells 26 bonds or more, the Exchange charges an 
execution fee of $0.10 per bond. There is a $100 execution fee cap 
per transaction. The Exchange intends to submit a separate filing to 
make the pilot program permanent.
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Responsibilities of BLPs

(A) Quoting Requirements

    Under proposed Rule 88(a), a BLP would be required to maintain: (1) 
A bid at least seventy percent (70%) of the trading day for a bond; (2) 
an offer at least seventy percent (70%) of the trading day for a bond; 
and (3) a bid or offer at the Exchange's Best Bid (``BB'') or 
Exchange's Best Offer (``BO'') at least five percent (5%) of the 
trading day in each of its bonds in the aggregate. To create a 
financial incentive to serve as a BLP, proposed Rule 88(b) provides 
that a BLP that meets the quoting requirement for a bond as described 
in paragraph (a) would receive the liquidity provider rebate set forth 
in the Exchange's Price List. The Exchange intends to submit a separate 
filing that would set the liquidity provider rebate at $0.05 per bond, 
with a $50 rebate cap per transaction.
    Currently, there are no live quote obligations in the corporate 
bond market.\8\ The proposed live quoting obligation, combined with the 
additional obligation of being on the BB or BO at least five percent of 
the day, presents a significant market and technological change for 
fixed income dealers. As such, NYSE believes that the proposed rule 
change would strike an appropriate balance between the quoting 
obligations and financial incentives offered to BLPs. Nonetheless, in 
keeping with the pilot status of the proposed rule changes, the 
Exchange would monitor and evaluate this balance during the course of 
the pilot; as more liquidity is brought to the NYSE bond marketplace, 
the Exchange may consider revising the incentive and quoting structure 
as needed.
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    \8\ The absence of such data makes it difficult to evaluate the 
quality of such markets.
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(B) Qualifications

    To qualify as a BLP under proposed Rule 88(c), a member 
organization would be required to: (1) Demonstrate an ability to meet 
the quoting requirements of a BLP; (2) have mnemonics that identify to 
the Exchange BLP trading activity in assigned BLP bonds; (3) have 
adequate trading infrastructure and technology to support electronic 
trading.
    Because a BLP would only be permitted to trade electronically from 
off the Floor of the Exchange, a member organization's off-Floor 
technology must be fully automated to accommodate the Exchange's 
trading and reporting systems that are relevant to operating as a BLP. 
If a member organization were unable to support the relevant electronic 
trading and reporting systems of the Exchange for BLP trading activity, 
it would not qualify as a BLP.

(C) Application Process

    Under proposed Rule 88(d), to become a BLP, a member organization 
would be required to submit a BLP application form with all supporting 
documentation to the Exchange. The Exchange would determine whether an 
applicant was qualified to become a BLP as set forth above. After an 
applicant submitted a BLP application to the Exchange, with supporting 
documentation, the Exchange would notify the applicant member 
organization of its decision. If an applicant were approved by the 
Exchange to act as a BLP, the applicant would be required to establish 
connectivity with relevant Exchange systems before the applicant would 
be permitted to trade as a BLP on the Exchange. In the event an 
applicant is disapproved or disqualified under proposed Rule 88(d)(4) 
or (i)(2) by the Exchange, such applicant may request an appeal of such 
disapproval or disqualification by the Exchange as provided in proposed 
Rule 88(j) of the Rule, and/or reapply for BLP status three (3) months 
after the month in which the applicant received disapproval or 
disqualification notice from the Exchange.

(D) Voluntary Withdrawal of BLP Status

    A BLP would be permitted to withdraw from the status of a BLP by 
giving notice to the Exchange. Such withdrawal would become effective 
when those bonds assigned to the withdrawing BLP are reassigned to 
another BLP. After the Exchange receives the notice of withdrawal from 
the withdrawing BLP, the Exchange would reassign such bonds as soon as 
practicable, but no later than 30 days of the date the notice was 
received by the Exchange. If the reassignment of bonds takes longer 
than the 30-day period, the withdrawing BLP would have no further 
obligations and would not be held responsible for any matters 
concerning its previously assigned BLP bonds.

(E) Calculation of Quoting Requirements

    Beginning with the first month of operation as a BLP, the BLP must 
satisfy

[[Page 77026]]

the 70% quoting requirement for each of its assigned BLP bonds. The 
Exchange would determine whether a BLP met its 70% quoting requirement 
by determining the average percentage of time a BLP was at a bid 
(offer) in each of its BLP bonds during the regular trading day \9\ on 
a daily and monthly basis. The Exchange would determine whether a BLP 
has met this requirement by calculating the following:
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    \9\ ``Trading day'' means any day on which the Exchange is 
scheduled to be open for business. Days on which the Exchange closes 
prior to 4 p.m. (Eastern Time) for any reason, which may include any 
regulatory halt or trading halt, are considered a trading day.
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     A ``Daily Bid Quoting Percentage'' would be calculated by 
determining the percentage of time a BLP had at least 10 displayed BLP 
bonds at a single price level in an Exchange bid during each trading 
day for a calendar month;
     A ``Daily Offer Quoting Percentage'' would be calculated 
by determining the percentage of time a BLP had at least 10 displayed 
BLP bonds at a single price level in an Exchange offer during each 
trading day for a calendar month;
     A ``Monthly Average Bid Quoting Percentage'' would be 
calculated for each BLP bond by summing the bond's ``Daily Bid Quoting 
Percentages'' for each trading day in a calendar month then dividing 
the resulting sum by the total number of trading days in such calendar 
month; and
     A ``Monthly Average Offer Quoting Percentage'' would be 
calculated for each BLP bond by summing the bond's ``Daily Offer 
Quoting Percentage'' for each trading day in a calendar month then 
dividing the resulting sum by the total number of trading days in such 
calendar month.
    Only displayed orders entered throughout the trading day would be 
used when calculating whether a BLP is in compliance with its 70% 
average quoting requirements.
    The BLP's 5% quoting requirements would not be in effect during the 
first two months of operation as a BLP in order to allow the BLP time 
to achieve this quoting metric. The 5% quoting requirement would take 
effect in the third month of a BLP's operation. At that time, a BLP 
would be required to satisfy the 5% quoting requirement for each 
assigned BLP bond. The Exchange would determine whether a BLP had met 
its 5% quoting requirement by determining the average percentage of 
time a BLP was at the BB or BO in each of its assigned BLP bonds during 
the regular trading day on a daily and monthly basis, as follows:
     A ``Daily BB Quoting Percentage'' would be calculated by 
determining the percentage of time a BLP had at least one displayed BLP 
bond in an Exchange bid at the BB during each trading day for a 
calendar month;
     A ``Daily BO Quoting Percentage'' would be calculated by 
determining the percentage of time a BLP had at least one displayed BLP 
bond in an Exchange offer at the BO during each trading day for a 
calendar month;
     A ``Daily BBO Quoting Percentage'' would be calculated for 
each trading day by summing the ``Daily BB Quoting Percentage'' and the 
``Daily BO Quoting Percentage'' in each BLP bond; and
     A ``Monthly Average BBO Quoting Percentage'' would be 
calculated for each BLP bond by summing the bond's ``Daily BBO Quoting 
Percentages'' for each trading day in a calendar month then dividing 
the resulting sum by the total number of trading days in such calendar 
month.
    Only displayed orders at the BB and BO throughout the trading day 
would be used when calculating whether a BLP is in compliance with its 
5% average quoting requirement.

(F) Matching of BLPs and Issuers

    During the proposed pilot program, an issuer may be represented by 
only one BLP. Prior to the commencement of the pilot, the Exchange 
would match issuers with BLPs that have been approved under proposed 
Rule 88(d) in the following manner. In the first round of matching, the 
Exchange would match BLPs to issuers that have at least one debt issue 
with a current outstanding principal of $500 million or greater. BLPs 
would be permitted to select the issuers that they want to represent 
from this group; the order in which BLPs would be permitted to make 
their selections would be determined by lottery. Each BLP would make 
one selection in the random order determined by the lottery, and the 
process would continue until all BLPs have exhausted their selections 
for this group of issuers.
    In the second round of matching, the Exchange would match BLPs to 
issuers with one of more debt issues that each has a current 
outstanding principal of less than $500 million. Each BLP would submit 
a list of the issuers and the issuer's bonds that it would be willing 
to represent. The BLP that is willing to represent the most bonds for a 
given issuer would be matched to that issuer. In event of a tie (i.e., 
two or more issuers seeking to represent the same issuer and the same 
number of that issuer's bonds), the BLP with the highest lottery number 
from the first round would be matched with the issuer.
    After the commencement of the program, matching would continue in a 
manner similar to the second round of matching prior to commencement of 
the program. On a monthly basis, BLPs would be permitted to apply for 
unrepresented issuers. The BLP willing to represent the most debt 
issuances of an issuer would be awarded status as a BLP for such 
issuer, with ties resolved by lottery.
    A BLP must represent each debt issuance of an issuer that has an 
outstanding principal of $500 million or more. A BLP also may represent 
any issuance below such level, but would not be required to do so. If a 
BLP is representing a debt issuance that was above $500 million but 
falls below such level, or has voluntarily been representing an 
issuance below the $500 million level where the outstanding principal 
amount has since been reduced, the BLP may cease representing such 
issue by notifying the Exchange in writing by the 15th day of the 
month, in which case the BLP may cease acting as such on the 1st day of 
the following month.
    The Exchange believes that this matching process would be fair to 
approved BLPs and beneficial to issuers. In light of the unique nature 
of the debt market, the matching process would give BLPs the 
opportunity to select the issuers that they want to represent and 
thereby take into account the BLP's expertise in particular issuers and 
sectors. The matching process for the largest issuers would be 
determined on a random basis, while the matching process for smaller 
issuers would be determined in favor of those BLPs willing to offer the 
broadest coverage to such issuers. NYSE anticipates that this process 
would result in the broadest coverage of issuers and sectors upon 
commencement of the pilot.

(G) Failure To Meet Quoting Requirements

    If, in any given calendar month after the first two months a BLP 
acted as a BLP, a BLP fails to meet any of the quoting requirements set 
forth in paragraph (a) of proposed Rule 88, the BLP would no longer be 
eligible for the rebate for the affected bond. If a BLP's failure to 
meet the quoting requirements continues for three consecutive calendar 
months in any assigned BLP bond, the Exchange could, in its discretion, 
take one or more of the following actions: (i) Revoke the assignment of 
all of the affected issuer's bonds from the BLP; (ii) revoke the 
assignment of an additional unaffected issuer from a BLP; or (iii) 
disqualify a member organization from its status as a BLP.

[[Page 77027]]

    The Exchange, in its sole discretion, would determine if and when a 
member organization is disqualified from its status as a BLP. One 
calendar month prior to any such determination, the Exchange would 
notify a BLP of such impending disqualification in writing. When 
disqualification determinations are made, the Exchange would provide a 
disqualification notice to the member organization.
    If a member organization were disapproved pursuant to paragraph 
(d)(2) of the proposed Rule or disqualified from its status as a BLP 
pursuant to paragraph (i)(1)(C) of the proposed Rule, such member 
organization could re-apply for BLP status three calendar months after 
the month in which the member organization received its 
disqualification notice.

(H) Appeal of Disapproval or Disqualification

    In the event a member organization disputes the Exchange's decision 
to disapprove or disqualify it under Rule 88(d)(4) or (i)(2), such 
member organization (``appellant'') may request, within five (5) 
business days of receiving notice of the decision, the Bond Liquidity 
Provider Panel (``BLP Panel'') to review all such decisions to 
determine if such decisions were correct.
    In the event a member organization is disqualified from its status 
as a BLP pursuant to proposed Rule 88(i)(2), the Exchange will not 
reassign the appellant's bonds to a different BLP until the BLP Panel 
has informed the appellant of its ruling.
    The BLP Panel will consist of the NYSE's Chief Regulatory Officer 
(``CRO''), or a designee of the CRO, and two (2) officers of the 
Exchange designated by the Co-Head of U.S. Listings and Cash Execution. 
The BLP Panel will review the facts and render a decision within the 
time frame prescribed by the Exchange. The BLP Panel may overturn or 
modify an action taken by the Exchange and all determinations by the 
BLP Panel will constitute final action by the Exchange on the matter at 
issue.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\10\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\11\ in particular, in that it is designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to remove impediments to and perfect 
the mechanism of a free and open market and a national market system, 
and, in general, to protect investors and the public interest. The 
Exchange believes the proposed rule changes are consistent with these 
principles in that they seek to expand the number of member 
organizations that can trade debt securities on the NYSE, establish a 
new class of market participants, BLPs, that will provide additional 
liquidity to the bond market, and in general promote a free and open 
market. The Exchange believes that investors will benefit from 
increased transparency, competition and liquidity in its bond 
marketplace.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
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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 that is not necessary or appropriate 
in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to 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 (i) as the Commission may 
designate up to 90 days of such date 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 Commission's Internet comment form http://www.sec.gov/rules/sro.shtml; or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-NYSE-2010-74 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSE-2010-74. This file 
number should be included on the subject line if e-mail 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 20549-1090, on official business days between the 
hours of 10 a.m. and 3 p.m. Copies of the filing will also be available 
for inspection and copying at the NYSE's principal office and on its 
Web site at http://www.nyse.com. 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-NYSE-2010-74 and should be submitted on or before 
January 3, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-31102 Filed 12-9-10; 8:45 am]
BILLING CODE 8011-01-P


