[Federal Register Volume 82, Number 212 (Friday, November 3, 2017)]
[Notices]
[Pages 51319-51322]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-23928]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81982; File No. SR-IEX-2017-36]


Self-Regulatory Organizations; Investors Exchange LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Clarify 
the Eligibility of Market Orders and Limit Orders With a Time-In-Force 
of DAY for a Volatility Auction Occurring Outside of Regular Market 
Hours

October 30, 2017.
    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 October 19, 2017, the Investors Exchange LLC (``IEX'' or 
the ``Exchange'') filed with the Securities and Exchange Commission 
(the ``Commission'') the proposed rule change as described in Items I 
and II 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

    (a)[sic] Pursuant to the provisions of Section 19(b)(1) under the 
Securities Exchange Act of 1934 (``Act''),\4\ and Rule 19b-4 
thereunder,\5\ Investors Exchange LLC (``IEX'' or ``Exchange'') is 
filing with the Commission a proposed rule change to clarify the 
eligibility of market orders and limit orders with a time-in-force of 
DAY \6\ for a Volatility Auction \7\ occurring outside of Regular 
Market Hours.\8\ The Exchange has designated this rule change as ``non-
controversial'' under Section 19(b)(3)(A) of the Act \9\ and provided 
the Commission with the notice required by Rule 19b-4(f)(6) 
thereunder.\10\
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    \4\ 15 U.S.C. 78s(b)(1).
    \5\ 17 CRF 240.19b-4.
    \6\ See Rule 11.190(c)(3).
    \7\ See Rule 11.350(f).
    \8\ See Rule 1.160(gg).
    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 240.19b-4.
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    The text of the proposed rule change is available at the Exchange's 
Web site at www.iextrading.com, at the principal office of the 
Exchange, and at the Commission's Public Reference Room.

[[Page 51320]]

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 these statement [sic] may be examined 
at the places specified in Item IV below. The self-regulatory 
organization 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 purpose of this proposed rule change is to clarify the 
eligibility of market orders and limit orders with a time-in-force of 
DAY for a Volatility Auction occurring outside of Regular Market Hours. 
On August 4, 2017, the Commission approved a proposed rule change filed 
by the Exchange to adopt rules governing auctions in IEX-listed 
securities, including a Volatility Auction process to resume trading 
after a Limit Up-Limit Down trading pause in an IEX-listed 
security.\11\ The Exchange intends on launching a listings program for 
corporate issuers in the fourth quarter of 2017.
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    \11\ See Securities Exchange Act Release No. 81316 (August 4, 
2017), 82 FR 37474 (August 10, 2017).
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    Pursuant to Rule 11.350(f), the Exchange will conduct a Volatility 
Auction to resume trading following a Limit Up-Limit Down trading pause 
in an IEX-listed security pursuant to IEX Rule 11.280(e). Furthermore, 
pursuant to Rule 11.350(f)(3), when an IEX-listed security is paused 
pursuant to IEX Rule 11.280(e) at or after the Closing Auction Lock-in 
Time,\12\ or the Order Acceptance Period \13\ of a Volatility Auction 
for a security paused before the Closing Auction Lock-in Time pursuant 
to IEX Rule 11.280(e) would otherwise be extended by the Exchange to a 
time after the Closing Auction Lock-in Time, no Closing Auction for the 
security will occur. Instead, the Exchange will conduct a Volatility 
Auction at the end of Regular Market Hours to determine the IEX 
Official Closing Price for the security.
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    \12\ See Rule 11.350(a)(22).
    \13\ See Rule 11.350(a)(29)(C).
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    When the Exchange is closing with a Volatility Auction pursuant to 
Rule 11.350(f)(3), Users may begin entering Auction Eligible Orders at 
the beginning of the Order Acceptance Period for participation in the 
Volatility Auction. Furthermore, Market-On-Close (``MOC'') \14\ and 
Limit-On-Close (``LOC'') \15\ orders queued for the Closing Auction 
will be incorporated into the Auction Book \16\ for the Volatility 
Auction. Moreover, non-displayed interest with a time-in-force of DAY 
and pegged orders are immediately canceled, in order to allow Users to 
re-enter such interest as Auction Eligible Orders.\17\ In contrast to 
the Closing Auction, there are no ``lock-in'' or ``lock-out'' 
restrictions on order entry, modification, or cancellation leading up 
to the Volatility Auction.
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    \14\ See Rule 11.350(a)(24).
    \15\ See Rule 11.350(a)(20).
    \16\ See Rule 11.350(a)(1).
    \17\ See Rule 11.350(a)(2).
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    At the end of Regular Market Hours, the Exchange will attempt to 
conduct the Volatility Closing auction using all Auction Eligible 
Orders. However, if there is a market order imbalance (i.e., one or 
more market order shares will not be executed in the auction), or the 
auction match price is outside of the Volatility Auction Collar \18\ 
(either resulting in an ``Impermissible Price'' \19\), the Order 
Acceptance Period is automatically extended for five minutes, and the 
Volatility Auction Collar is expanded in the direction of the 
Impermissible Price.\20\ Similarly, if the Indicative Clearing Price 
differs by the greater of five percent (5%) or fifty cents ($0.50) from 
any of the previous fifteen (15) Indicative Clearing Price 
disseminations, the Order Acceptance period will be extended for an 
additional five-minute period.\21\ Pursuant to Supplemental Material 
.03 of Rule 11.350(a), if a Volatility Auction originally scheduled to 
occur during Regular Market Hours receives an automatic extension which 
causes the auction to occur outside of Regular Market Hours, limit 
orders with a time-in-force of DAY, and market orders which were 
submitted during the Order Acceptance Period within Regular Market 
Hours are included in the Volatility Auction, and are only canceled by 
the System after the auction match, or if the auction is extended to 
the end of Post-Market Hours.\22\
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    \18\ See Rule 11.350(a)(31).
    \19\ See Rule 11.350(a)(17).
    \20\ See Rule 11.350(f)(3)(B)(ii)(d). See also Rule 
11.350(f)(2)(D) regarding the process for incremental extensions of 
the Order Acceptance Period.
    \21\ See Rule 11.350(f)(3)(B)(ii)(e).
    \22\ See Rule 1.160(aa).
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Proposed Clarifications
    During development and testing of the functionality for Volatility 
Auctions, the Exchange identified a minor ambiguity in Supplemental 
Material .03 of Rule 11.350(a) regarding the eligibility of market 
orders and limit orders with a time-in-force of DAY when closing with a 
Volatility Auction outside of Regular Market Hours. Specifically, 
Supplemental Material .03 does not distinguish between routable and 
non-routable orders. Thus, the Exchange proposes to clarify that only 
non-routable limit orders with a time-in-force of DAY, and non-routable 
market orders which were submitted during the Order Acceptance Period 
within Regular Market Hours, are included in the Volatility Auction. 
The Exchange's routing logic is one of numerous distributed components 
that together make up the Exchange's System, but is separate and 
distinct from the order book logic that is responsible for conducting 
the Volatility Auction match; however, the Exchange did not explicitly 
make this important distinction between such processes in the current 
Supplemental Material .03. Furthermore, the interactions between the 
routing logic and the order book are optimized for continuous trading, 
and the archetypal Opening, Closing, IPO, Halt, and Volatility 
Auctions, but supporting the extended expiration of routable orders 
with a time-in-force of DAY when the Exchange is closing with a 
Volatility Auction that is extended beyond Regular Market Hours 
requires complex technology changes that raise risks to the System. 
Accordingly, in the interest of investor protection and the public 
interest, the Exchange is proposing to instead clarify that such 
routable orders will not be included in the Volatility Auction, and 
will instead be canceled at the end of Regular Market Hours in 
accordance with their standard expiry instructions.\23\
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    \23\ Notably, based on an analysis conducted by the Exchange of 
trading activity year to date, there have been only ten (10) cases 
where a trading pause was in effect during the final ten (10) 
minutes of the trading day, eight (8) of which occurred on fully 
electronic markets causing such primary listing market to close the 
security using an auction equivalent to the IEX Volatility Auction, 
but in none of the eight cases was there an extension of such 
auction that pushed the auction match beyond Regular Market Hours. 
Thus, the Exchange believes this scenario to be an extremely rare 
edge case.
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    The Exchange notes that Users intending to trade in a Volatility 
Auction which is extended that receive cancelations at the end of 
Regular Market Hours on routable orders with a time-in-force of DAY 
when the Exchange is closing with a Volatility Auction that is extended 
beyond

[[Page 51321]]

Regular Market Hours will have a five-minute opportunity to re-enter 
such orders as Auction Eligible Orders during the extended Order 
Acceptance Period. Thus, the Exchange believes that there will be no 
material adverse impact to Users that choose to interact with IEX 
Auctions using routable orders when the Exchange is closing with a 
Volatility Auction that is extended beyond Regular Market Hours.
    In addition to the proposed clarification discussed above, the 
Exchange proposes to further clarify that only non-routable market 
orders entered during the Order Acceptance Period within Regular Market 
Hours are included in the Volatility Auction when the Exchange is 
closing with a Volatility Auction that is extended beyond Regular 
Market Hours. On September 26, 2017, the Commission noticed an 
immediately effective Exchange rule filing to, in part, clarify that in 
the event an IEX-listed security is subject to a trading pause, the 
Router Constraint Reference Price \24\ is invalid.\25\ Furthermore, the 
Exchange clarified that pursuant to Rule 11.190(f)(2)(B), in the 
absence of a valid Router Constraint Reference Price, the Exchange will 
reject any routable orders for the security. Accordingly, consistent 
with Rule 11.190(f)(2)(B), the Exchange proposes to clarify that when 
the Exchange is closing with a Volatility Auction, only non-routable 
market orders entered during the Order Acceptance Period within Regular 
Market Hours will be included in the Volatility Auction, because 
routable market orders will be rejected.
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    \24\ Rule 11.190(f)(2) sets forth the operation of the IEX 
Router Constraint, which prevents an order from routing at prices 
more aggressive than the Router Constraint price range. The Order 
Collar and Router Constraint price ranges are calculated by applying 
the numerical guidelines for clearly erroneous executions to the 
Order Collar Reference Price and Router Constraint Reference Price, 
respectively.
    \25\ See Securities and Exchange Act Release No. 81662 
(September 20, 2017), 82 FR 44861 (September 26, 2017) (SR-IEX-2017-
31).
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    Lastly, as announced in IEX Trading Alert #2017-015, the Exchange 
intends to become a primary listing exchange and support its first IEX-
listed security in November of 2017.\26\ In addition, as part of the 
listings initiative, the Exchange is providing a series of industry 
wide weekend tests for the Exchange and its Members to exercise the 
various technology changes required to support IEX Auctions and 
listings functionality.\27\ Accordingly, in order to provide clarity to 
Members and other market participants regarding the handling of orders 
eligible for participation in the Volatility Auction when the Exchange 
is closing with a Volatility Auction, and such auction is extended past 
the end of Regular Market Hours, the Exchange is proposing to make the 
clarifying changes to Supplemental Material .03 of Rule 11.350(a), as 
described above.
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    \26\ See IEX Trading Alert #2017-015 (Listings Specifications, 
Testing Opportunities, and Timelines), May 31, 2017. See also IEX 
Trading Alert #2017-040 (Rescheduled 4th Listing Functionality 
Industry Test), September 29, 2017.
    \27\ See, e.g., IEX Trading Alert #2017-028 (First Listings 
Functionality Industry Test on Saturday, August 26), August 17, 
2017; IEX Trading Alert #2017-037 (Second Listings Functionality 
Industry Test on Saturday, September 9), September 7, 2017; IEX 
Trading Alert #2017-039 (Third Listings Functionality Industry Test 
on Saturday, September 23), September 18, 2017; IEX Trading Alert 
#2017-040 (Rescheduled 4th Listing Functionality Industry Test), 
September 29, 2017.
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2. Statutory Basis
    IEX believes that the proposed rule change is consistent with the 
provisions of Section 6(b) \28\ of the Act in general, and furthers the 
objectives of Section 6(b)(5) of the Act \29\ 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.
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    \28\ 15 U.S.C. 78f.
    \29\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed rule clarification does not 
alter the substantive functionality governing the process for closing 
with a Volatility Auction that is extended beyond Regular Market Hours, 
but instead clarifies the Exchanges [sic] handling of orders during 
such process, and makes the Exchanges [sic] rules more clear and 
complete. The Exchange further believes that the proposed clarifying 
rule change is consistent with the protection of investors and the 
public interest because the proposed clarifications are designed to 
avoid any potential confusion regarding the Exchange's handling of 
orders when closing with a Volatility Auction that is extended beyond 
Regular Market Hours as IEX continues industry-wide testing to exercise 
the technology changes being made by the Exchange and its Members to 
support IEX as a listings market. Additionally, the Exchange believes 
it is consistent with the Act to clarify the rule provisions governing 
the process for closing with a Volatility Auction that is extended 
beyond Regular Market Hours so that IEX's rules are accurate and 
descriptive of the System's functionality as approved by the 
Commission, and to avoid any potential confusion among Members and 
market participants regarding such functionality.
    Lastly, as discussed above, the Exchange believes that providing 
Users the proposed clarification regarding the Exchange's order 
handling is consistent with the protection of investors and the public 
interest, because supporting the extended expiration of routable orders 
with a time-in-force of DAY when the Exchange is closing with a 
Volatility Auction that is extended beyond Regular Market Hours 
requires complex technology changes that raise potential risks to the 
System. Accordingly, the Exchange is proposing to clarify the handling 
of such orders, rather than increase the technical complexities within 
the System that raise risks to Exchange operations, Members, and their 
investor clients.
    The Exchange also believes that the proposed rule change would not 
result in unfair discrimination, since all Members can enter routable 
or non-routable orders. Moreover, as discussed in the Burden on 
Competition section, Users intending to trade in the Closing Auction or 
the Volatility Auction that receive cancelations will have a five-
minute opportunity to re-enter such orders as Auction Eligible Orders 
during the extended Order Acceptance Period.

B. Self-Regulatory Organization's Statement on Burden on Competition

    IEX does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. The Exchange believes that the 
proposed correction does not impact inter-market competition in any 
respect since it is designed to clarify the Exchange's handling of 
orders when closing with a Volatility Auction that is extended beyond 
Regular Market Hours, without substantively changing the approved Rules 
governing such process.
    In addition, the Exchange does not believe that the proposed 
changes will have any impact on intra-market competition. Specifically, 
the Exchange believes that although routable limit orders with a time-
in-force of DAY will be canceled at the end of Regular Market Hours 
when the Exchange is closing with a Volatility Auction that is extended 
beyond Regular Market Hours, whereas non-routable limit orders with a 
time-in-force of DAY will be eligible to participate in the Auction, 
Users intending to trade in the Closing Auction or the Volatility 
Auction that receive cancelations will have a five-minute opportunity 
to re-enter such

[[Page 51322]]

orders as Auction Eligible Orders during the extended Order Acceptance 
Period.
    Similarly, the Exchange believes that although routable market 
orders entered during the Order Acceptance Period within Regular Market 
Hours will be rejected and therefore will not be eligible to 
participate in the auction when the Exchange is closing with a 
Volatility Auction, whereas non-routable market orders entered during 
the Order Acceptance Period within Regular Market Hours will be 
eligible to participate in the auction, Users intending to trade in the 
Volatility Auction that are rejected upon entry will have an 
opportunity to re-enter such orders as Auction Eligible Orders during 
the entire Order Acceptance Period. Thus, the Exchange believes that 
there will be no material adverse impact on competition between 
Members, or to any individual Member that chooses to interact with IEX 
Auctions using routable orders when the Exchange is closing with a 
Volatility Auction that is extended beyond Regular Market Hours. 
Furthermore, the Exchange notes that Users are free to enter both 
routable and non-routable orders on the Exchange, and therefore can 
optimize their interaction with the Exchange to avoid any unwanted 
cancelation.

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

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the proposed rule change does not (i) significantly affect 
the protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative for 30 
days from the date on which it was filed, or such shorter time as the 
Commission may designate if consistent with the protection of investors 
and the public interest, the proposed rule change has become effective 
pursuant to Section 19(b)(3)(A) of the Act \30\ and Rule 19b-4(f)(6) 
thereunder.\31\
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    \30\ 15 U.S.C. 78s(b)(3)(A).
    \31\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires the Exchange to give the Commission written notice of the 
Exchange's intent to file the proposed rule change, along with a 
brief description and text of the proposed rule change, at least 
five business days prior to the date of filing of the proposed rule 
change, or such shorter time as designated by the Commission. The 
Exchange has satisfied this requirement.
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    A proposed rule change filed under Rule 19b-4(f)(6) \32\ normally 
does not become operative for 30 days after the date of filing. 
However, pursuant to Rule 19b-4(f)(6)(iii),\33\ the Commission may 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has asked 
the Commission to waive the 30-day operative delay so that the proposal 
may become operative immediately upon filing. The Commission believes 
that waiver of the operative delay is consistent with the protection of 
investors and the public interest because the Exchange's proposal does 
not raise any new or novel issues. In addition, the Commission notes 
that, as described above, Users whose routable orders are cancelled 
pursuant to the proposed rule will have an opportunity to participate 
in the auction when IEX closes with a Volatility Auction that occurs 
outside Regular Market Hours by re-entering their orders as Auction 
Eligible Orders during the extended Order Acceptance Period. 
Accordingly, the Commission hereby waives the 30-day operative delay 
requirement and designates the proposed rule change as operative upon 
filing.\34\
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    \32\ 17 CFR 240.19b-4(f)(6).
    \33\ 17 CFR 240.19b-4(f)(6)(iii).
    \34\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings under 
Section 19(b)(2)(B) of the Act to determine whether the proposed rule 
change should be approved or 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 email to [email protected]. Please include 
File Number SR-IEX-2017-36 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-IEX-2017-36. This file 
number should be included in 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 20549-1090. Copies of the filing will also be 
available for inspection and copying at the IEX's principal office and 
on its Internet Web site at www.iextrading.com. 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-IEX-2017-36 and should be submitted on 
or before November 24, 2017.
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    \35\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\35\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-23928 Filed 11-2-17; 8:45 am]
BILLING CODE 8011-01-P


