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e9-23965

  • FR Doc E9-23965[Federal Register: October 6, 2009 (Volume 74, Number 192)]

    [Notices]

    [Page 51264-51268]

    From the Federal Register Online via GPO Access [wais.access.gpo.gov]

    [DOCID:fr06oc09-30]

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    COMMODITY FUTURES TRADING COMMISSION

    Notice of Intent, Pursuant to the Authority in Section 2(h)(7) of

    the Commodity Exchange Act and Commission Rule 36.3(c)(3), To Undertake

    a Determination Whether the SP-15 Financial Day-Ahead LMP Peak

    Contract; SP-15 Financial Day-Ahead LMP Peak Daily Contract; SP-15

    Financial Day-Ahead LMP Off-Peak Daily Contract; SP-15 Financial Swap

    Real Time LMP--Peak Daily Contract; SP-15 Financial Day-Ahead LMP Off-

    Peak Contract; NP-15 Financial Day-Ahead LMP Peak Daily Contract; and

    NP-15 Financial Day-Ahead LMP Off-Peak Daily Contract, Offered for

    Trading on the IntercontinentalExchange, Inc., Perform Significant

    Price Discovery Functions

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Notice of action and request for comment.

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    SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or

    ``Commission'') is undertaking a review to determine whether the SP-15

    Financial Day-Ahead LMP \1\ Peak (``SPM'') contract; SP-15 Financial

    Day-Ahead LMP Peak Daily (``SDP'') contract; SP-15 Financial Day-Ahead

    LMP Off-Peak Daily (``SQP'') contract; SP-15 Financial Swap Real Time

    LMP--Peak Daily (``SRP'') contract; SP-15 Financial Day-Ahead LMP Off-

    Peak Contract (``OFP''); NP-15 Financial Day-Ahead LMP Peak Daily

    (``DPN'') contract; and NP-15 Financial Day-Ahead LMP Off-Peak Daily

    (``UNP'') contract, offered for trading on the

    IntercontinentalExchange, Inc. (``ICE''), an exempt commercial market

    (``ECM'') under Sections 2(h)(3)-(5) of the Commodity Exchange Act

    (``CEA'' or the ``Act''), perform significant price discovery

    functions. Authority for this action is found in section 2(h)(7) of the

    CEA and Commission rule 36.3(c)

    [[Page 51265]]

    promulgated thereunder. In connection with this evaluation, the

    Commission invites comment from interested parties.

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    \1\ The term LMP represents ``locational marginal price,'' which

    represents the additional cost associated with producing an

    incremental amount of electricity. LMPs account for generation

    costs, congestion along the transmission lines, and loss.

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    DATES: Comments must be received on or before October 21, 2009.

    ADDRESSES: Comments may be submitted by any of the following methods:

    Follow the instructions for submitting comments. Federal

    eRulemaking Portal: http://www.regulations.gov.

    E-mail: secretary@cftc.gov. Include ICE SP-15 Financial

    Day-Ahead LMP Peak (SPM) Contract; ICE SP-15 Financial Day-Ahead LMP

    Peak Daily (SDP) Contract; ICE SP-15 Financial Day-Ahead LMP Off-Peak

    Daily (SQP) Contract; ICE SP-15 Financial Swap Real Time LMP--Peak

    Daily (SRP) Contract; ICE SP-15 Financial Day-Ahead LMP Off-Peak (OFP)

    Contract; ICE NP-15 Financial Day-Ahead LMP Peak Daily (DPN) Contract;

    and/or ICE NP-15 Financial Day-Ahead LMP Off-Peak Daily (UNP) Contract

    in the subject line of the message, depending on the subject

    contract(s) to which the comments apply.

    Fax: (202) 418-5521.

    Mail: Send to David A. Stawick, Secretary, Commodity

    Futures Trading Commission, Three Lafayette Centre, 1155 21st Street,

    NW., Washington, DC 20581.

    Courier: Same as mail above.

    All comments received will be posted without change to http://

    www.CFTC.gov/.

    FOR FURTHER INFORMATION CONTACT: Gregory K. Price, Industry Economist,

    Division of Market Oversight, Commodity Futures Trading Commission,

    Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581.

    Telephone: (202) 418-5515. E-mail: gprice@cftc.gov; or Susan Nathan,

    Senior Special Counsel, Division of Market Oversight, same address.

    Telephone: (202) 418-5133. E-mail: snathan@cftc.gov.

    SUPPLEMENTARY INFORMATION:

    I. Introduction

    On March 16, 2009, the CFTC promulgated final rules implementing

    provisions of the CFTC Reauthorization Act of 2008 (``Reauthorization

    Act'') \2\ which subjects ECMs with significant price discovery

    contracts (``SPDCs'') to self-regulatory and reporting requirements, as

    well as certain Commission oversight authorities, with respect to those

    contracts. Among other things, these rules and rule amendments revise

    the information-submission requirements applicable to ECMs, establish

    procedures and standards by which the Commission will determine whether

    an ECM contract performs a significant price discovery function, and

    provide guidance with respect to compliance with nine statutory core

    principles applicable to ECMs with SPDCs. These rules became effective

    on April 22, 2009.

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    \2\ 74 FR 12178 (Mar. 23, 2009); these rules became effective on

    April 22, 2009.

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    In determining whether an ECM's contract is or is not an SPDC, the

    Commission will consider the contract's material liquidity, price

    linkage to other contracts, potential for arbitrage with other

    contracts traded on designated contract markets or derivatives

    transaction execution facilities, use of the ECM contract's prices to

    execute or settle other transactions, and other factors.

    In order to facilitate the Commission's identification of possible

    SPDCs, Commission rule 36.3(c)(2) requires that an ECM operating in

    reliance on section 2(h)(3) promptly notify the Commission and provide

    supporting information or data concerning any contract: (i) That

    averaged five trades per day or more over the most recent calendar

    quarter; and (ii) (A) for which the ECM sells price information

    regarding the contract to market participants or industry publications;

    or (B) whose daily closing or settlement prices on 95 percent or more

    of the days in the most recent quarter were within 2.5 percent of the

    contemporaneously determined closing, settlement, or other daily price

    of another agreement.

    II. Determination of an SPDC

    A. The SPDC Determination Process

    Commission rule 36.3(c)(3) establishes the procedures by which the

    Commission makes and announces its determination on whether a specific

    ECM contract serves a significant price discovery function. Under those

    procedures, the Commission will publish a notice in the Federal

    Register that it intends to undertake a determination as to whether the

    specified agreement, contract, or transaction performs a significant

    price discovery function and to receive written data, views, and

    arguments relevant to its determination from the ECM and other

    interested persons.\3\ After prompt consideration of all relevant

    information,\4\ the Commission will, within a reasonable period of time

    after the close of the comment period, issue an order explaining its

    determination. Following the issuance of an order by the Commission

    that the ECM executes or trades an agreement, contract, or transaction

    that performs a significant price discovery function, the ECM must

    demonstrate, with respect to that agreement, contract, or transaction,

    compliance with the core principles under section 2(h)(7)(C) of the CEA

    \5\ and the applicable provisions of part 36. If the Commission's order

    represents the first time it has determined that one of the ECM's

    contracts performs a significant price discovery function, the ECM must

    submit a written demonstration of its compliance with the core

    principles within 90 calendar days of the date of the Commission's

    order. For each subsequent determination by the Commission that the ECM

    has an additional SPDC, the ECM must submit a written demonstration of

    its compliance with the core principles within 30 calendar days of the

    Commission's order.

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    \3\ The Commission may commence this process on its own

    initiative or on the basis of information provided to it by an ECM

    pursuant to the notification provisions of Commission rule

    36.3(c)(2).

    \4\ Where appropriate, the Commission may choose to interview

    market participants regarding their impressions of a particular

    contract. Further, while they may not provide direct evidentiary

    support with respect to a particular contract, the Commission may

    rely for background and context on resources such as its October

    2007 Report on the Oversight of Trading on Regulated Futures

    Exchanges and Exempt Commercial Markets (``ECM Study''). http://

    www.cftc.gov/stellent/groups/public/@newsroom/documents/file/pr5403-

    07_ecmreport.pdf.

    \5\ 7 U.S.C. 2(h)(7)(C).

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    B. SP-15 Financial Day-Ahead LMP Peak Contract

    The SPM contract is cash settled based on the arithmetic average of

    peak-hour, day-ahead LMPs posted by the California ISO \6\ (CAISO) for

    the SP-15 Existing Zone Generation (EZ Gen) Hub for all peak hours in

    the calendar month. The LMPs are derived from power trades that result

    in physical delivery. The size of the SPM contract is 400 megawatt

    hours (``MWh''), and the unit of trading is the number of peak days in

    the contract month multiplied by 400 MWh (one 400-MWh increment is

    referred to as a lot). In other words, a minimum of 400 MWh must be

    delivered each peak day of the month, and trading is restricted to

    multiples of the number of peak days in the contract month. The SPM

    contract is listed for up to 110 months including four entire calendar

    years.

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    \6\ The acronym ``ISO'' signifies ``Independent System

    Operator,'' which is an entity that coordinates electricity

    generation and transmission, as well as the grid reliability,

    throughout its service area.

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    Based upon a required quarterly notification filed on July 27, 2009

    (mandatory under Rule 36.3(c)(2)), the

    [[Page 51266]]

    ICE reported that, with respect to its SPM contract, 3,235 separate

    transactions occurred in the second quarter of 2009, resulting in a

    daily average of 50.5 trades. During the same period, the SPM contract

    had a total trading volume of 143,717 contracts, and an average daily

    trading volume of 2,245.6 contracts. Moreover, the open interest in the

    contract as of June 30, 2009, was 460,583 contracts.

    It appears that the SPM contract may satisfy the material liquidity

    and material price reference factors for SPDC determination. With

    respect to material liquidity, trading in the SPM contract averaged

    more than 2,000 contracts on a daily basis, with approximately 50

    separate transactions each day. In addition, the open interest in the

    subject contract was extremely large. In regard to material price

    reference, while it did not specifically address the power contracts

    under review, the ECM Study stated that, in general, market

    participants view the ICE as a price discovery market for certain

    electricity contracts. Specifically, power contracts based on actively-

    traded hubs are transacted heavily on the ICE's electronic trading

    platform, with the remainder being traded over-the-counter through

    voice brokers and potentially submitted for clearing. In addition, the

    ICE sells its price data to market participants in a number of

    different packages which vary in terms of the hubs covered, time

    periods, and whether the data are daily only or historical. For

    example, the ICE offers ``West Power End of Day'' data packages with

    access to all price data or just 12, 24, 36, or 48 months of historical

    data.

    C. SP-15 Financial Day-Ahead LMP Peak Daily Contract

    The SDP contract is cash settled based on the arithmetic average of

    peak-hour, day-ahead LMPs posted by the CAISO for the SP-15 EZ Gen Hub

    for all peak hours on the day prior to generation. The LMPs are derived

    from power trades that result in physical delivery. The size of the SDP

    contract is 400 MWh. The SDP contract is listed for 45 consecutive

    calendar days.

    Based upon a required quarterly notification filed on July 27, 2009

    (mandatory under Rule 36.3(c)(2)), the ICE reported that, with respect

    to its SDP contract, 6,159 separate transactions occurred in the second

    quarter of 2009, resulting in a daily average of 96.2 trades. During

    the same period, the SDP contract had a total trading volume of 23,365

    contracts and an average trading volume of 365.1 contracts per day.

    Moreover, the open interest in the contract as of June 30, 2009, was

    3,387 contracts.

    It appears that the SDP contract may satisfy the material liquidity

    and material price reference factors for SPDC determination. With

    respect to material liquidity, trading in the ICE SDP contract averaged

    more than 350 contracts on a daily basis, with more than 95 separate

    transactions each day. In addition, the open interest in the subject

    contract was large. In regard to material price reference, while it did

    not specifically address the power contracts under review, the ECM

    Study stated that, in general, market participants view the ICE as a

    price discovery market for certain electricity contracts. Specifically,

    power contracts based on actively-traded hubs are transacted heavily on

    the ICE's electronic trading platform, with the remainder being traded

    over-the-counter through voice brokers and potentially submitted for

    clearing. In addition, the ICE sells its price data to market

    participants in a number of different packages which vary in terms of

    the hubs covered, time periods, and whether the data are daily only or

    historical. For example, the ICE offers ``West Power End of Day'' data

    packages with access to all price data or just 12, 24, 36, or 48 months

    of historical data.

    D. SP-15 Financial Swap Real Time LMP--Peak Daily

    The SRP contract is cash settled based on the arithmetic average of

    hourly, real-time LMPs posted by the CAISO for the SP-15 EZ Gen Hub for

    all peak hours in the day of the electricity generation. The LMPs are

    derived from power trades that result in physical delivery. The size of

    the SRP contract is 400 MWh, and the unit of trading is any multiple of

    400 MWh. The SRP contract is listed for 45 consecutive calendar days.

    Based upon a required quarterly notification filed on July 27, 2009

    (mandatory under Rule 36.3(c)(2)), the ICE reported that, with respect

    to its SRP contract, 826 separate transactions occurred in the second

    quarter of 2009, resulting in a daily average of 12.9 trades. During

    the same period, the SRP contract had a total trading volume of 1,014

    contracts and an average trading volume of 15.8 contracts per day.

    Moreover, the open interest in the contract as of June 30, 2009, was

    143 contracts.

    It appears that the SRP contract may satisfy the material liquidity

    and material price reference factors for SPDC determination. With

    respect to material liquidity, trading in the ICE SRP contract averaged

    more than 15 contracts on a daily basis, with more than 12 separate

    transactions each day. In addition, the open interest in the subject

    contract was substantial. In regard to material price reference, while

    it did not specifically address the power contracts under review, the

    ECM Study stated that, in general, market participants view the ICE as

    a price discovery market for certain electricity contracts.

    Specifically, power contracts based on actively-traded hubs are

    transacted heavily on the ICE's electronic trading platform, with the

    remainder being traded over-the-counter through voice brokers and

    potentially submitted for clearing. In addition, the ICE sells its

    price data to market participants in a number of different packages

    which vary in terms of the hubs covered, time periods, and whether the

    data are daily only or historical. For example, the ICE offers ``West

    Power End of Day'' data packages with access to all price data or just

    12, 24, 36, or 48 months of historical data.

    E. SP-15 Financial Day-Ahead LMP Off-Peak Contract

    The OFP contract is cash settled based on the arithmetic average of

    off-peak-hour, day-ahead LMPs posted by the CAISO for the SP-15

    Existing Zone Generation (EZ Gen) Hub for all off-peak hours in the

    calendar month. The LMPs are derived from power trades that result in

    physical delivery. The size of the OFP contract is 25 megawatt hours

    (``MWh''), and the unit of trading is any multiple of 25 MWh. That is,

    a minimum of 25 MWh must be delivered each off-peak day of the month,

    and trading is restricted to multiples of the number of off-peak days

    in the contract month. The OFP contract is listed for up to 86 months

    including three entire calendar years.

    Based upon a required quarterly notification filed on April 30,

    2009 (mandatory under Rule 36.3(c)(2)), the ICE reported that its OFP

    contract met the minimum five trades or more per day threshold in the

    first quarter of 2009. During that period, the OFP contract had a total

    trading volume of 1,159,586 contracts and the open interest as of March

    31, 2009, was 3,259 contracts.

    It appears that the ICE OFP contract may satisfy the material

    liquidity and material price reference factors for SPDC determination.

    With respect to material liquidity, the OFP contract met the minimum

    trading threshold with a total trading volume of over one million

    contracts in the first quarter of 2009. In addition, the ending open

    interest was sizeable. In regard to material price reference, while it

    did not specifically

    [[Page 51267]]

    address the power contracts under review, the ECM Study stated that, in

    general, market participants view the ICE as a price discovery market

    for certain electricity contracts. Specifically, power contracts based

    on actively-traded hubs are transacted heavily on the ICE's electronic

    trading platform, with the remainder being traded over-the-counter

    through voice brokers and potentially submitted for clearing. In

    addition, the ICE sells its price data to market participants in a

    number of different packages which vary in terms of the hubs covered,

    time periods, and whether the data are daily only or historical. For

    example, the ICE offers ``West Power End of Day'' data packages with

    access to all price data or just 12, 24, 36, or 48 months of historical

    data.

    F. NP-15 Financial Day-Ahead LMP Peak Daily Contract

    The DPN contract is cash settled based on the arithmetic average of

    the peak-hour, day-ahead LMPs posted by the CAISO for the NP-15 EZ Gen

    Hub for peak hours on the day prior to generation. The LMPs are derived

    from power trades that result in physical delivery. The size of the DPN

    contract is 400 MWh. The DPN contract is listed for 45 consecutive

    calendar days.

    Based upon a required quarterly notification filed on July 27, 2009

    (mandatory under Rule 36.3(c)(2)), the ICE reported that, with respect

    to its DPN contract, 2,782 separate transactions occurred in the second

    quarter of 2009, resulting in a daily average of 43.5 trades. During

    the same period, the DPN contract had a total trading volume of 5,766

    contracts and an average trading volume of 90.1 contracts per day.

    Moreover, the open interest in the contract as of June 30, 2009, was

    947 contracts.

    It appears that the DPN contract may satisfy the material liquidity

    and material price reference factors for SPDC determination. With

    respect to material liquidity, trading in the ICE DPN contract averaged

    approximately 90 contracts on a daily basis, with more than 40 separate

    transactions each day. In addition, the open interest in the subject

    contract was significant. In regard to material price reference, while

    it did not specifically address the power contracts under review, the

    ECM Study stated that, in general, market participants view the ICE as

    a price discovery market for certain electricity contracts.

    Specifically, power contracts based on actively-traded hubs are

    transacted heavily on the ICE's electronic trading platform, with the

    remainder being traded over-the-counter through voice brokers and

    potentially submitted for clearing. In addition, the ICE sells its

    price data to market participants in a number of different packages

    which vary in terms of the hubs covered, time periods, and whether the

    data are daily only or historical. For example, the ICE offers ``West

    Power End of Day'' data packages with access to all price data or just

    12, 24, 36, or 48 months of historical data.

    G. NP-15 Financial Day-Ahead LMP Off-Peak Daily Contract

    The UNP contract is cash settled based on the arithmetic average of

    the off-peak-hour, day-ahead LMPs posted by the CAISO for the NP-15 EZ

    Gen Hub for off-peak hours on the day prior to generation. The LMPs are

    derived from power trades that result in physical delivery. The size of

    the UNP contract is 25 MWh. The UNP contract is listed for 45

    consecutive calendar days.

    Based upon a required quarterly notification filed on July 27, 2009

    (mandatory under Rule 36.3(c)(2)), the ICE reported that, with respect

    to its UNP contract, 1,925 separate transactions occurred in the second

    quarter of 2009, resulting in a daily average of 30.1 trades. During

    the same period, the UNP contract had a total trading volume of 36,936

    contracts and an average trading volume of 577.1 contracts per day.

    Moreover, the open interest in the contract as of June 30, 2009, was

    4,152 contracts.

    It appears that the UNP contract may satisfy the material liquidity

    and material price reference factors for SPDC determination. With

    respect to material liquidity, trading in the ICE UNP contract averaged

    more than 575 contracts on a daily basis, with more than 30 separate

    transactions each day. In addition, the open interest in the subject

    contract was large. In regard to material price reference, while it did

    not specifically address the power contracts under review, the ECM

    Study stated that, in general, market participants view the ICE as a

    price discovery market for certain electricity contracts. Specifically,

    power contracts based on actively-traded hubs are transacted heavily on

    the ICE's electronic trading platform, with the remainder being traded

    over-the-counter through voice brokers and potentially submitted for

    clearing. In addition, the ICE sells its price data to market

    participants in a number of different packages which vary in terms of

    the hubs covered, time periods, and whether the data are daily only or

    historical. For example, the ICE offers ``West Power End of Day'' data

    packages with access to all price data or just 12, 24, 36, or 48 months

    of historical data.

    III. Request for Comment

    In evaluating whether an ECM's agreement, contract, or transaction

    performs a significant price discovery function, section 2(h)(7) of the

    CEA directs the Commission to consider, as appropriate, four specific

    criteria: price linkage, arbitrage, material price reference, and

    material liquidity. As it explained in Appendix A to the part 36 rules,

    the Commission, in making SPDC determinations, will apply and weigh

    each factor, as appropriate, to the specific contract and circumstances

    under consideration.

    As part of its evaluation, the Commission will consider the written

    data, views, and arguments from any ECM that lists the potential SPDC

    and from any other interested parties. Accordingly, the Commission

    requests comment on whether the subject contracts perform significant

    price discovery functions. Commenters' attention is directed

    particularly to Appendix A of the Commission's part 36 rules for a

    detailed discussion of the factors relevant to an SPDC determination.

    The Commission notes that comments which analyze the contracts in terms

    of these factors will be especially helpful to the determination

    process. In order to determine the relevance of comments received, the

    Commission requests that commenters explain in what capacity are they

    knowledgeable about the subject contracts. Moreover, commenters are

    requested to identify the contract or contracts to which their comments

    apply.

    IV. Related Matters

    A. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \7\ imposes certain

    requirements on Federal agencies, including the Commission, in

    connection with their conducting or sponsoring any collection of

    information, as defined by the PRA. Certain provisions of final

    Commission rule 36.3 impose new regulatory and reporting requirements

    on ECMs, resulting in information collection requirements within the

    meaning of the PRA; OMB previously has approved and assigned OMB

    control number 3038-0060 to this collection of information.

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    \7\ 44 U.S.C. 3507(d).

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    B. Cost-Benefit Analysis

    Section 15(a) of the CEA \8\ requires the Commission to consider

    the costs and

    [[Page 51268]]

    benefits of its actions before issuing an order under the Act. By its

    terms, section 15(a) does not require the Commission to quantify the

    costs and benefits of such an order or to determine whether the

    benefits of such an order outweigh its costs; rather, it requires that

    the Commission ``consider'' the costs and benefits of its action.

    Section 15(a) further specifies that the costs and benefits shall be

    evaluated in light of five broad areas of market and public concern:

    (1) Protection of market participants and the public; (2) efficiency,

    competitiveness, and financial integrity of futures markets; (3) price

    discovery; (4) sound risk management practices; and (5) other public

    interest considerations.

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    \8\ 7 U.S.C.19(a).

    ---------------------------------------------------------------------------

    The bulk of the costs imposed by the requirements of Commission

    Rule 36.3 relate to significant and increased information-submission

    and reporting requirements adopted in response to the Reauthorization

    Act's directive that the Commission take an active role in determining

    whether contracts listed by ECMs qualify as SPDCs. The enhanced

    requirements for ECMs will permit the Commission to acquire the

    information it needs to discharge its newly-mandated responsibilities

    and to ensure that ECMs with SPDCs are identified as entities with the

    elevated status of registered entity under the CEA and are in

    compliance with the statutory terms of the core principles of section

    2(h)(7)(C) of the Act. The primary benefit to the public is to enable

    the Commission to discharge its statutory obligation to monitor for the

    presence of SPDCs and extend its oversight to the trading of SPDCs.

    Issued in Washington, DC on September 22, 2009 by the

    Commission.

    David A. Stawick,

    Secretary of the Commission.

    [FR Doc. E9-23965 Filed 10-5-09; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: October 6, 2009



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