[Federal Register Volume 74, Number 19 (Friday, January 30, 2009)]
[Proposed Rules]
[Pages 5628-5631]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-1996]


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 Proposed Rules
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
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  Federal Register / Vol. 74, No. 19 / Friday, January 30, 2009 / 
Proposed Rules  

[[Page 5628]]



FEDERAL RESERVE SYSTEM

12 CFR Part 204

[Regulation D; Docket No. R-1350]


Reserve Requirements of Depository Institutions

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice of proposed rulemaking; request for public comment.

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SUMMARY: The Board is requesting public comment on proposed amendments 
to Regulation D, Reserve Requirements of Depository Institutions, to 
authorize the establishment of limited-purpose accounts at Federal 
Reserve Banks (``Reserve Banks'') for the maintenance of excess 
balances of eligible institutions (both as defined in Regulation D). 
These excess balance accounts (``EBAs'') would contain only the excess 
balances of the eligible institutions participating in such accounts, 
although the participating eligible institutions (``EBA Participants'') 
would authorize another institution (``EBA Agent'') to manage the EBA 
on their behalf. The authorization of EBAs is intended to allow 
eligible institutions to earn interest on their excess balances at the 
excess balance rate in an account relationship directly with the 
Federal Reserve Bank as counterparty without disrupting established 
business relationships with their correspondents. Continuing strains in 
financial markets and the configuration of interest rates support the 
implementation of EBAs; however, the Board will evaluate the continuing 
need for EBAs when more normal market functioning is restored. The 
Board seeks comment on all aspects of the proposal.

DATES: Comments must be submitted by March 2, 2009.

ADDRESSES: You may submit comments, identified by Docket No. R-1350, by 
any of the following methods:
    Agency Web Site: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm. Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments.
    E-mail: [email protected]. Include the docket number 
in the subject line of the message.
    Fax: (202) 452-3819 or (202) 452-3102.
    Mail: Jennifer J. Johnson, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue, NW., 
Washington, DC 20551.
    All public comments are available from the Board's Web site at 
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons. Accordingly, your 
comments will not be edited to remove any identifying or contact 
information.
    Public comments may also be viewed electronically or in paper in 
Room MP-500 of the Board's Martin Building (20th and C Streets, NW.) 
between 9 a.m. and 5 p.m. on weekdays.

FOR FURTHER INFORMATION CONTACT: Sophia H. Allison, Senior Counsel 
(202/452-3565), or Dena L. Milligan, Staff Attorney (202/452-3900), 
Legal Division, or Seth Carpenter, Deputy Associate Director (202/452-
2385), or Margaret Gillis DeBoer, Section Chief (202/452-3139), 
Division of Monetary Affairs; for users of Telecommunications Device 
for the Deaf (TDD) only, contact (202/263-4869); Board of Governors of 
the Federal Reserve System, 20th and C Streets, NW., Washington, DC 
20551.

SUPPLEMENTARY INFORMATION:

I. Background--Interest on Reserves

    Section 128 of the Emergency Economic Stabilization Act of 2008, 
enacted on October 3, 2008 (the ``2008 Act''), accelerated the 
effective date of the authority for the Reserve Banks to pay earnings 
on balances maintained at the Reserve Banks by or on behalf of 
depository institutions. The 2008 Act made this authority effective on 
October 1, 2008. This authority was originally enacted in Title II of 
the Financial Services Regulatory Relief Act of 2006 (the ``2006 Act'') 
(Pub. L. 109-351, 120 Stat. 1966 (Oct. 13, 2006)), with an original 
effective date of October 1, 2011. The 2006 Act provides that such 
earnings must be paid at least once each quarter at a rate or rates not 
to exceed the general level of short-term interest rates. The 2006 Act 
also provides that the Board may prescribe regulations concerning the 
payment of earnings, the distribution of earnings to the depository 
institutions that maintain balances or on whose behalf balances are 
maintained, and the responsibilities of correspondents to distribute 
and credit earnings on balances maintained by the respondent on a pass-
through basis with the correspondent.
    On October 9, 2008, the Board published in the Federal Register an 
interim final rule amending Regulation D (Reserve Requirements of 
Depository Institutions) to direct the Reserve Banks to pay interest on 
balances held at Reserve Banks to satisfy reserve requirements 
(``required reserve balances'') and balances held in excess of required 
reserve balances and clearing balances (``excess balances'') (73 FR 
59482) (Oct. 9, 2008). At that time, the Board announced two formulas 
by which the amount of earnings payable on required reserve balances 
and excess balances would be calculated. For required reserve balances, 
the Board set the initial formula for the rate of interest to be the 
average federal funds rate target established by the Federal Open 
Market Committee (the ``FOMC'') over the reserve maintenance period 
less 10 basis points. For excess balances, the Board set the initial 
formula for the rate of interest to be the lowest federal funds rate 
target established by the FOMC in effect during the reserve maintenance 
period minus 75 basis points. The Board stated that it might adjust the 
formula for the interest rate on excess balances in light of experience 
and evolving market conditions. The Board has subsequently adjusted the 
formula for the rate of interest for excess balances three times and 
the rate of interest on required reserve balances twice. The rate of 
interest on both required reserve balances and on excess balances 
currently is equal to \1/4\ percent. The Board may from time to time 
determine any other rate or rates for such balances, which would be 
announced when determined.

[[Page 5629]]

II. Maintenance of Required Reserve Balances and Excess Balances

    Under Regulation D, a depository institution must maintain reserves 
against its reservable liabilities in the form of cash in its vault or, 
if vault cash is insufficient, in the form of a balance in an account 
at a Reserve Bank.\1\ 12 CFR 204.3(b)(1). A depository institution may 
maintain such balances in an account in its own name at a Reserve Bank, 
or it may choose a pass-through correspondent through which it may pass 
through its required reserve balance. The pass-through correspondent 
holds its respondents' required reserve balances in an account of the 
correspondent at a Reserve Bank. Under Regulation D, the balance in a 
pass-through correspondent's account at a Reserve Bank is deemed to be 
the property of the pass-through correspondent exclusively, and the 
account balance represents a liability of the Reserve Bank solely to 
the pass-through correspondent, regardless of whether the funds 
represent the required reserve balances of another institution that 
have been passed through the pass-through correspondent. 12 CFR 
204.3(i)(2).
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    \1\ The 2006 Act amended section 19 of the Act to authorize 
member banks to enter into pass-through account arrangements. Prior 
to the 2006 Act, only nonmember banks were authorized to enter into 
such arrangements. See Notice of Proposed Rulemaking, Request for 
Public Comment, 73 FR 8009 (Feb. 12, 2008).
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    Under the Board's October interim final rule, any excess balances 
in a pass-through correspondent's account are deemed to be balances 
held on behalf of its respondents. Reserve Banks credit the pass-
through correspondent's account with the interest on the required 
reserve balances and excess balances of the pass-through 
correspondent's respondents. The October interim final rule permits, 
but does not require, correspondents to pass back the interest earned 
to their respondents.

III. Implications in the Current Market Environment

    The respondents of a pass-through correspondent can, by agreement 
with the correspondent, receive earnings on their excess balances by 
directing the correspondent to sell those balances in the federal funds 
market, or by having the correspondent hold those balances in the 
correspondent's account at a Reserve Bank under a pass-through 
arrangement. These two approaches have different implications for the 
correspondent's balance sheet and its leverage ratio for capital 
adequacy purposes.
    As noted above, Regulation D currently deems the entire balance in 
a pass-through correspondent's account at a Reserve Bank to be the 
exclusive property of the pass-through correspondent and to represent a 
liability of that Reserve Bank to the pass-through correspondent 
exclusively. Therefore, the pass-through correspondent must show the 
entire balance in its Reserve Bank account on its own balance sheet as 
an asset, even if the balance consists, in whole or in part, of amounts 
that are passed through on behalf of a respondent.\2\
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    \2\ The same would be true of a correspondent that was not 
acting in a pass-through capacity: its entire account balance at the 
Reserve Bank would be an asset on the correspondent's own balance 
sheet. Regulation D, however, does not specifically address 
correspondents other than pass-through correspondents.
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    Accordingly, when a correspondent's respondents want to earn 
interest on excess balances by leaving them with their correspondent 
(which in turn passes those balances through to the Reserve Bank), the 
correspondent has a larger balance at the Reserve Bank. As a result, 
the correspondent has more assets on its balance sheet and a lower 
leverage ratio for capital adequacy purposes.
    In contrast, when the correspondent sells the respondent's federal 
funds on the respondent's behalf, the respondent directs its 
correspondent to transfer funds to the entity purchasing federal funds. 
This transaction is effected by a debit to the correspondent's account 
at a Reserve Bank and a credit to the purchaser's account at a Reserve 
Bank. On the correspondent's balance sheet, all other things being 
equal, the correspondent's assets decline (as does its liability to its 
respondent) because the correspondent's account balance at the Reserve 
Bank is lower and therefore its regulatory leverage ratio would be 
higher.
    Since the implementation of interest on excess balances through the 
October interim final rule, the actual federal funds rate has generally 
averaged significantly below the interest rate paid by the Reserve 
Banks on excess balances, although this spread narrowed significantly 
after the FOMC established a range for the federal funds rate of 0 to 
\1/4\ percent on December 16. When the market rate of interest on 
federal funds is below the rate paid by the Reserve Banks on excess 
balances, respondents have an incentive to shift the investment of 
their surplus funds away from sales of federal funds (through their 
correspondents acting as agents), and toward holding funds directly as 
excess balances with the Reserve Banks, potentially disrupting 
established correspondent-respondent relationships. A correspondent 
could offer to purchase federal funds directly from its respondents and 
hold those funds as excess balances at a Reserve Bank; however, such 
transactions could result in a significant reduction in regulatory 
leverage ratios for some correspondents. The Board believes that the 
disparity between the actual federal funds rate and the rate paid by 
Reserve Banks on excess balances may partly be caused by the leverage 
incentives imposed on correspondent institutions to sell excess 
balances into the federal funds market rather than maintaining those 
balances in an account at a Reserve Bank.

IV. EBA Proposal

    The Board is proposing to authorize the establishment of EBAs to 
reduce disruptions in established relationships between correspondents 
and their respondents that would result from a shift by those 
respondents away from federal funds sales and toward holding excess 
balances in individual accounts at the Reserve Banks. These disruptions 
appear to be directly related to the current configuration of interest 
rates and the unprecedented volume of excess balances provided through 
the Federal Reserve's open market operations and liquidity facilities. 
When more normal market functioning resumes, the Board would re-
evaluate the continuing need for EBAs.
    The Board proposes to authorize EBAs with the following 
characteristics.

A. Account Structure

    EBAs would be established by the EBA Participants. One possible 
application of this structure would be that the respondent institutions 
of a particular correspondent could become EBA Participants by 
establishing an EBA for the maintenance overnight of their aggregate 
excess balances. The EBA would be established at the Reserve Bank where 
the EBA Agent (discussed below) maintains its own master account. All 
EBA Participants would be required to be the type of institution that 
is eligible, as defined in the 2008 Act, to receive interest on their 
excess balances.\3\ Any eligible institution could be an EBA 
Participant.
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    \3\ The 2008 Act permits Federal Reserve Banks to pay interest 
on balances held by or on behalf of ``depository institutions,'' but 
the 2008 Act's definition of ``depository institution'' has a 
broader meaning than the definition of that term in section 
19(b)(1)(A) of the Act and Regulation D. Therefore, the Board 
believed that a different term would be useful to refer only to 
those institutions included in the 2008 Act's broader definition of 
``depository institution.'' In its October 9, 2008 notice of 
proposed rulemaking, the Board proposed using the term ``eligible 
institution'' to refer to institutions that are eligible to receive 
interest on their balances maintained at Federal Reserve Banks. 
``Eligible institution'' includes the depository institutions 
defined in section 19(b)(1)(A) of the Act, including banks, savings 
associations, savings banks and credit unions that are federally 
insured or eligible to apply for federal insurance. ``Eligible 
institution'' also includes trust companies, Edge and agreement 
corporations, and U.S. agencies and branches of foreign banks. The 
definition does not include all entities for which the Reserve Banks 
hold accounts, such as entities for which the Reserve Banks act as 
fiscal agents, including Federal Home Loan Banks.

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[[Page 5630]]

    As noted above, Regulation D currently provides that balances in a 
pass-through correspondent's account at a Reserve Bank represent a 
liability of the Reserve Bank solely to that pass-through 
correspondent, even though that account may also contain funds that are 
attributable to one or more of the pass-through correspondent's 
respondent institutions. With the EBA, however, all balances in the EBA 
would be deemed to be the property solely of the EBA Participants, and 
to represent a liability of the Reserve Bank to the EBA Participants 
alone and not to the EBA Agent. Because the excess balances of EBA 
Participants in EBAs would be the Reserve Bank's direct liability to 
the EBA Participants, the adverse leverage impact of such arrangements 
on correspondents would be mitigated.

B. Authority to Manage Account

    The EBA Participants of an EBA would be required to authorize one 
institution (which may or may not be an ``eligible institution'' but 
that must have its own account at a Reserve Bank) to manage the EBA on 
behalf of the EBA Participants, including giving instructions for the 
transfer of EBA Participants' excess balances in and out of the EBA. 
The EBA Agent would not be allowed to commingle its own funds in the 
EBA. The EBA Agent would be required to have its own account at a 
Federal Reserve Bank. The EBA Agent could be, but need not be, a 
correspondent institution that serves the EBA Participants as its 
respondents under a correspondent, or pass-through correspondent, 
arrangement. This EBA Agent would be authorized to place EBA 
Participant excess balances into the EBA, remove those excess balances, 
and generally manage the EBA (which may include facilitating the 
opening of the EBA on behalf of EBA Participants). The EBA Agent would 
be responsible for determining amounts of excess balances to deposit 
into the EBA and for maintaining adequate records to demonstrate the 
level of excess balances in the EBA of each EBA Participant. The 
Reserve Banks would calculate interest on an EBA on an aggregate basis 
and would not calculate an interest amount for each EBA Participant. 
The EBA Participants would be responsible for instructing the EBA Agent 
with respect to the disposition of the interest and the balances, of 
the EBA Participant in the EBA--presumably within the context of any 
applicable correspondent-respondent agreement, taking into account all 
of the services and other terms and conditions of the relationship.

C. Limited-Purpose Properties of Account

    The EBA would exist for the sole purpose of holding excess balances 
of EBA Participants, generally on an overnight basis. The EBA would not 
be permitted to be overdrawn at any time, either intra-day or 
overnight. Balances maintained overnight in an EBA would not satisfy a 
required reserve balance or a contractual clearing balance for any EBA 
Participant or for the EBA Agent. The EBA could not be used for general 
payments or other activities.

D. Payment of Interest on EBAs

    Excess balances maintained in an EBA would earn interest at the 
excess balances rate specified in section 204.10(b)(2) of Regulation D. 
The Board's interim final rule published in the Federal Register on 
October 9 defines ``excess balances'' as an institution's balances in 
an account at a Reserve Bank in excess of the institution's required 
reserve balance (which may be zero) and the institution's contractual 
clearing balance (if any). The October 9 interim final rule also 
provides that interest on required reserve balances and excess balances 
is credited to eligible institutions 15 days after the close of the 
applicable reserve maintenance period. Under Regulation D, the reserve 
maintenance period is the period during which a depository institution 
must maintain, on average, its required reserve balance. For 
institutions with reservable liabilities below the exemption amount or 
those with only a contractual clearing balance, the reserve maintenance 
period is one week long. The Board would compute average balances in an 
EBA during a one-week maintenance period that begins on Thursday and 
ends the following Wednesday and would credit interest to the EBA 
fifteen (15) days after the close of the one-week maintenance period. 
The EBA Agent would be responsible for disbursing interest in the EBA 
in accordance with the directions given by each EBA Participant to the 
EBA Agent for such disbursements.

V. Section-by-Section Analysis

Section 204.10(d)(6)

    Proposed section 204.10(d)(6) adds a new subsection to section 
204.10(d), which sets forth definitions relating to the payment of 
interest on reserves and other balances maintained at Reserve Banks. 
Proposed section 204.10(d)(6) adds the term ``excess balance account'' 
as a defined term in Regulation D. Section 204.10(d) defines ``excess 
balance account'' as an account at a Reserve Bank established by one or 
more eligible institutions and in which only excess balances of the 
participating eligible institutions may at any time be maintained. 
Proposed section 204.10(d)(6) also clarifies that such an account is 
not a ``pass-through account'' for purposes of Regulation D. This 
clarification is appropriate because a pass-through account represents 
a liability of a Reserve Bank solely to a correspondent institution, 
whereas the liability represented by an EBA represents a liability of 
the Reserve Bank solely to the institutions whose excess balances are 
maintained in the EBA.

Section 204.10(e)(1)

    Proposed section 204.10(e)(1) provides that eligible institutions 
may establish an EBA at a Reserve Bank when the EBA is (A) established 
by the eligible institutions and is (B) established solely for the 
purpose of maintaining overnight excess balances of the participating 
eligible institutions. Proposed section 204.10(e)(1) also provides that 
balances maintained in such an account are the property of the eligible 
institutions that participate in the EBA, and represent a liability of 
the Reserve Bank solely to those institutions. Proposed section 
204.10(e)(1) is intended to distinguish such account arrangements from 
the definition and operation of the term ``pass-through account'' 
elsewhere in Regulation D.

Section 204.10(e)(2)

    Proposed section 204.10(e)(2) sets forth the regulatory provisions 
relating to the appointment and authorization of an EBA Agent to manage 
an EBA on behalf of EBA Participants. The EBA Agent must have its own 
account at a Reserve Bank unless otherwise determined by the Board. 
Proposed section 204.10(e)(2) also provides that an EBA Agent must not 
commingle any of its own funds in an EBA at any time, either intra-day 
or overnight.

[[Page 5631]]

Section 204.10(e)(3)

    Proposed section 204.10(e)(3) specifies that balances maintained in 
an EBA must consist solely of excess balances of EBA Participants, and 
that such balances will not satisfy any institution's required reserve 
balance or contractual clearing balance.

Section 204.10(e)(4)

    Proposed section 204.10(e)(4) specifies that an EBA is for the 
exclusive purpose of maintaining EBA Participants' excess balances and 
is not be used for general payments or other activities.

Section 204.10(e)(5)

    Proposed section 204.10(e)(5) provides that balances in an EBA 
would earn interest at the rate specified for ``excess balances'' in 
current section 204.10(b)(2) of Regulation D.

VI. Form of Comment Letters

    Comment letters should refer to Docket No. R-1350 and, when 
possible, should use a standard typeface with a font size of 10 or 12; 
this will enable the Board to convert text submitted in paper form to 
machine-readable form through electronic scanning, and will facilitate 
automated retrieval of comments for review. Comments may be mailed 
electronically to [email protected].

VII. Solicitation of Comments Regarding Use of ``Plain Language''

    Section 722 of the Gramm-Leach-Bliley Act of 1999 (12 U.S.C. 4809) 
requires the Board to use ``plain language'' in all proposed and final 
rules published after January 1, 2000. The Board invites comments on 
whether the interim final rule is clearly stated and effectively 
organized, and how the Board might make the text of the rule easier to 
understand.

VIII. Regulatory Flexibility Act

    The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA), 
requires an agency that is issuing a proposed rule to prepare and make 
available an initial regulatory flexibility analysis that describes the 
impact of the final rule on small entities. 5 U.S.C. 603(a). The RFA 
provides that an agency is not required to prepare and publish a 
regulatory flexibility analysis if the agency certifies that the final 
rule will not have a significant economic impact on a substantial 
number of small entities.
    Pursuant to section 605(b) of the RFA, the Board certifies that 
this interim final rule will not have a significant adverse economic 
impact on a substantial number of small entities. The proposed rule 
would permit, but does not require, institutions to establish EBAs at 
Reserve Banks. The impact on institutions choosing to establish EBAs at 
Reserve Banks would be positive and not adverse, because EBA 
Participants would be able to earn the rate payable on excess balances 
in a debtor-creditor relationship directly with a Reserve Bank without 
disrupting established correspondent-respondent relationships. 
Likewise, the impact would be positive and not adverse on institutions 
that choose to establish EBAs but are not currently in a correspondent-
respondent relationship, as such institutions would be expected to 
establish EBAs only to the extent that EBA Agents and EBA Participants 
found it mutually beneficial to do so.

IX. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act (PRA) of 1995 (44 
U.S.C. 3506; 5 CFR 1320 Appendix A.1), the Board reviewed the proposed 
rule under the authority delegated to the Board by the Office of 
Management and Budget (OMB). The proposed rule contains no requirements 
subject to the PRA.

List of Subjects in 12 CFR Part 204

    Banks, banking, Reporting and recordkeeping requirements.

Authority and Issuance

    For the reasons set forth in the preamble, the Board is proposing 
to amend 12 CFR part 204 as follows:

PART 204--RESERVE REQUIREMENTS OF DEPOSITORY INSTITUTIONS 
(REGULATION D)

    1. The authority citation for part 204 continues to read as 
follows:

    Authority: 12 U.S.C. 248(a), 248(c), 371a, 461, 601, 611, and 
6105.

    2. Section 204.10 is amended by adding new paragraphs (d)(6) and 
(e) to read as follows:


Sec.  204.10  Payment of interest on balances.

* * * * *
    (d) * * *
    (6) Excess balance account means an account at a Reserve Bank 
pursuant to Sec.  204.10(e) of this part that is established by one or 
more eligible institutions and in which only excess balances of the 
participating eligible institutions may at any time be maintained. An 
excess balance account is not a ``pass-through account'' for purposes 
of this part.
    (e) Excess balance accounts. (1) Establishing an excess balance 
account. A Reserve Bank may establish an excess balance account for 
eligible institutions under the provisions of this paragraph. 
Notwithstanding any other provisions of this part, the excess balances 
of eligible institutions in an excess balance account are the property 
of the eligible institutions that participate in the account, and 
represent a liability of the Reserve Bank solely to those participating 
eligible institutions.
    (2) The participating eligible institutions in an excess balance 
account shall authorize another institution to act as agent of the 
eligible institutions for purposes of general account management, 
including but not limited to transferring the excess balances of 
participating institutions in and out of the excess balance account. 
The agent must maintain its own separate account at a Reserve Bank 
unless otherwise determined by the Board. The agent may not commingle 
its own funds in the excess balance account.
    (3) No reserve balances or clearing balances of any institution may 
be maintained at any time in an excess balance account, and balances 
maintained in an excess balance account will not satisfy any 
institution's required reserve balance or contractual clearing balance.
    (4) An excess balance account may be used exclusively for the 
purpose of maintaining the excess balances of participants and may not 
be used for general payments or other activities.
    (5) Interest shall be paid on excess balances of eligible 
institutions maintained in an excess balance account in accordance with 
Sec.  204.10(b)(2) of this part.

    By order of the Board of Governors of the Federal Reserve 
System, January 25, 2009.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. E9-1996 Filed 1-29-09; 8:45 am]
BILLING CODE 6210-01-P