[Federal Register Volume 63, Number 125 (Tuesday, June 30, 1998)]
[Rules and Regulations]
[Pages 35782-35785]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-17525]
[[Page 35781]]
_______________________________________________________________________
Part VIII
Department of the Treasury
_______________________________________________________________________
Fiscal Service
_______________________________________________________________________
31 CFR Part 356
Sale and Issue of Marketable Book-Entry Treasury Bills, Notes, and
Bonds (Department of the Treasury Circular, Public Debt Series No. 1-
93); Final Rule
Federal Register / Vol. 63, No. 125 / Tuesday, June 30, 1998 / Rules
and Regulations
[[Page 35782]]
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DEPARTMENT OF THE TREASURY
Fiscal Service
31 CFR Part 356
Sale and Issue of Marketable Book-Entry Treasury Bills, Notes,
and Bonds (Department of the Treasury Circular, Public Debt Series No.
1-93)
AGENCY: Bureau of the Public Debt, Fiscal Service, Department of the
Treasury.
ACTION: Final rule.
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SUMMARY: The Department of the Treasury (``Treasury'' or
``Department'') is issuing in final form an amendment to 31 CFR Part
356 (Uniform Offering Circular for the Sale and Issue of Marketable
Book-Entry Treasury Bills, Notes, and Bonds). This amendment includes
changes necessary to make fungible stripped interest components for
Treasury inflation-indexed securities, which the Department began
issuing in January 1997. In addition, the amendment makes certain
technical clarifications and conforming changes.
EFFECTIVE DATE: March 31, 1999.
ADDRESSES: This final rule is available for downloading from the Bureau
of the Public Debt's Internet site at the following address:
www.publicdebt.treas.gov. It is also available for public inspection
and copying at the Treasury Department Library, FOIA Collection, Room
5030, Main Treasury Building, 1500 Pennsylvania Avenue, N.W.,
Washington, D.C., 20220. Persons wishing to visit the library should
call (202) 622-0990 for an appointment.
FOR FURTHER INFORMATION CONTACT: Kerry Lanham (Acting Director), Chuck
Andreatta or Kurt Eidemiller (Government Securities Specialists),
Bureau of the Public Debt, Government Securities Regulations Staff,
(202) 219-3632.
SUPPLEMENTARY INFORMATION:
I. Background
The Uniform Offering Circular (31 CFR Part 356) sets out the terms
and conditions for the sale and issuance by the Department of the
Treasury to the public of marketable Treasury bills, notes, and bonds.
The Uniform Offering Circular, in conjunction with offering
announcements, represents a comprehensive statement of those terms and
conditions.1
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\1\ The Uniform Offering Circular was published as a final rule
on January 5, 1993 (58 FR 412). The circular, as amended, is
codified at 31 CFR Part 356.
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In January 1997, the Department began issuing a new type of
marketable security, referred to as a Treasury inflation-indexed
security, whose principal value is adjusted for inflation as measured
by the Bureau of Labor Statistics of the U.S. Department of
Labor.2 The Department believes the issuance of these new
securities will reduce interest costs to the Treasury over the long
term and broaden the types of debt instruments available to investors
in U.S. financial markets.
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\2\ 62 FR 846 (January 6, 1997).
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Treasury inflation-indexed securities have been eligible for the
STRIPS (Separate Trading of Registered Interest and Principal of
Securities) program since Treasury began issuing the new securities.
STRIPS is the Department's program under which eligible securities are
authorized to be separated into principal and interest components
(interest components are also referred to as ``TINTS''). Such
components are maintained in book-entry accounts, and transferred
separately in the Treasury/Reserve Automated Debt Entry System
(``TRADES'' or the commercial book-entry system). Unlike TINTS from
Treasury fixed-principal securities, TINTS stripped from an inflation-
indexed security are currently not fungible (i.e., they are not
interchangeable) with TINTS stripped from a different inflation-indexed
security, even if the components have the same maturity (payment)
date.3
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\3\ See 31 CFR 356.31(f).
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In the preamble to the final rule amendments to accommodate the
issuance of inflation-indexed securities, the Department stated that it
would ``continue to work on making interest components fungible in a
manner that is operationally feasible.'' 4 The Department
recognizes that making stripped inflation-indexed interest components
fungible is important to developing a liquid market for these
components. The Department has worked with market participants to
develop a methodology that will accomplish this goal.
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\4\ 62 FR 846, 848 (January 6, 1997).
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The Department published for public comment a proposed amendment to
the Uniform Offering Circular on December 8, 1997,5 which
laid out the proposed methodology for making TINTS stripped from
different Treasury inflation-indexed securities fungible. The closing
date for comments was February 6, 1998. As explained in more detail
below, after considering the comments provided, Treasury has decided to
adopt the proposed methodology for making TINTS stripped from different
inflation-indexed securities fungible. This methodology will remain
unchanged from its description in the proposed rule. However, in order
to provide market participants sufficient time to make any necessary
automated systems changes, the effective date of this final rule will
be delayed until March 31, 1999.
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\5\ 62 FR 64528 (December 8, 1997).
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II. Comments Received in Response to the Proposed Rule
The Department received one comment letter on the proposed rule,
which was from The Bond Market Association
(``Association'').6 In developing the final rule, the
Department took the issues raised in this comment letter into
consideration, as well as input received during discussions with
various active Treasury securities market participants.
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\6\ See letter from Ms. Paula H. Simpkins, Vice President and
Assistant General Counsel, The Bond Market Association (dated
February 6, 1998). This letter is available to the public for
inspection and downloading on the Internet, at the address provided
earlier in this rule, and for inspection and copying at the Treasury
Department Library, at the address provided earlier.
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The Association generally supported the Department's efforts to
make TINTS of inflation-indexed securities fungible. The Association,
however, cited its members' concern with ``the significant
modifications needed for their operational systems to accommodate the
trading and maintenance of the adjusted value of stripped interest
components to the penny.'' The Association said its members believe
``that it will require approximately six to nine months to both make
and test the appropriate system changes before they can begin trading
the new stripped securities.'' Association members, the commenter said,
also expressed concerns that these system changes could complicate
efforts already underway to make operational system adjustments to
prepare for the year 2000, the European Monetary Unit and the General
Collateral Finance Repo product of the Government Securities Clearing
Corporation. Similar concerns were expressed to the Department in
discussions with various active Treasury market participants. The
Association suggested that Treasury consider truncating the pennies
from the adjusted values, so that the adjusted values would be
maintained in accounts and transferred in whole dollars.
The Association supported establishing a conversion factor between
securities issued under different CPI base reference periods if the
Consumer Price Index's base reference period is changed. Such a factor
would enable TINTS from inflation-indexed securities issued during
different CPI base
[[Page 35783]]
reference periods to be fungible. However, the Association recommended
that the conversion be done on a voluntary basis so investors could
decide whether the benefits outweigh the associated costs of
conversion. The Association also recommended the creation of an
additional conversion factor that would allow TINTS of inflation-
indexed securities issued during a more-recent base period to be
converted to an older base period. This additional convertibility, the
commenter asserted, would further increase the marketability of the
TINTS.
After taking the comments and views received into consideration,
the Department is issuing a final rule that adopts the proposed rule
without any significant changes. The suggestion to truncate the pennies
from the calculation of adjusted values was not adopted because of the
resulting payment differences to holders of inflation-indexed TINTS as
compared with holders of unstripped inflation-indexed securities,
particularly for smaller holders. However, in order to provide market
participants with sufficient time to make any automated systems changes
necessary for maintaining accounts and transferring adjusted values in
pennies, Treasury has decided to adopt the recommendation of The Bond
Market Association to delay the effective date. Accordingly, the
effective date of this final rule will be delayed until March 31, 1999.
In delaying the effective date, the Department recognizes the
significant efforts of market participants in making systems changes
for the year 2000 and the European Monetary Unit.
No changes are being proposed at this time to the current STRIPS
program for fixed-principal securities. However, as stated in the
preamble to the proposed rule, the Department will consider at a later
date the desirability of making changes to the minimum and multiple
requirements for fixed-principal TINTS similar to the requirements for
inflation-indexed TINTS, i.e., discontinuing the $1,000 minimum-to-hold
and multiple requirement, and permitting fixed-principal TINTS to be
held in amounts to the penny.
The suggestions to make conversions of adjusted values from less-
recent CPI base reference periods to more-recent base reference periods
voluntary, and to create an additional conversion factor to facilitate
conversions of adjusted values from more-recent periods to less-recent
periods, were also not adopted. The Department believes that these
suggestions, had they been adopted, would have been operationally very
complicated. They also would have continued to make inflation-indexed
TINTS not fungible to the extent that, in either case, there would have
to be different CUSIP numbers for TINTS that have the same maturity
(payment) date. The rule has been amended, therefore, so that in the
event that the CPI is rebased, conversion to the most-recent base
reference period will be mandatory. At such time, Treasury will publish
information specifying the manner in which this conversion will be
accomplished. In addition, any new TINTS created from a security that
was issued during a prior base reference period will be issued with
adjusted values calculated using reference CPIs under the most-recent
base reference period.
The only other change in the final rule from the proposed rule is
to provide for mandatory conversion to fungible TINTS of any TINTS
created prior to March 31, 1999.7 Treasury stated in the
preamble to the proposed rule that this conversion would occur because
of the Department's goal, where possible, to make all TINTS from
inflation-indexed securities fungible.8 Also as stated in
the preamble to the proposed rule, Treasury will provide public notice,
if necessary, informing participants of the effective conversion date,
along with detailed instructions regarding the conversion to fungible
STRIPS.
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\7\ As of May 31, 1998, none of the currently outstanding
inflation-indexed securities has been stripped.
\8\ 62 FR 64528, 64530 (December 8, 1997).
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III. Procedural Requirements
This final rule does not meet the criteria for a ``significant
regulatory action'' pursuant to Executive Order 12866. Although this
rule was issued initially in proposed form to secure the benefit of
public comment, the notice, public comment, and delayed effective date
provisions of the Administrative Procedure Act are inapplicable,
pursuant to 5 U.S.C. 553(a)(2).
As no notice of proposed rulemaking is required, the provisions of
the Regulatory Flexibility Act (5 U.S.C. 601, et seq.) do not apply.
There is no new collection of information contained in this final
rule and, therefore, the Paperwork Reduction Act does not apply. The
collections of information in 31 CFR Part 356 have been previously
approved by the Office of Management and Budget under section 3507(d)
of the Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35) under
control number 1535-0112. Under this Act, an agency may not conduct or
sponsor, and a person is not required to respond to, a collection of
information unless it displays a valid OMB control number.
List of Subjects in 31 CFR Part 356
Bonds, Federal Reserve System, Government securities, Reporting and
recordkeeping requirements, Securities.
For the reasons set forth in the preamble, 31 CFR Chapter II,
Subchapter B, Part 356, is amended as follows:
PART 356--SALE AND ISSUE OF MARKETABLE BOOK-ENTRY TREASURY BILLS,
NOTES, AND BONDS (DEPARTMENT OF THE TREASURY CIRCULAR, PUBLIC DEBT
SERIES NO. 1-93)
1. The authority citation for part 356 continues to read as
follows:
Authority: 5 U.S.C. 301; 31 U.S.C. 3102, et seq.; 12 U.S.C. 391.
2. Section 356.2 is amended by adding in alphabetical order the
definition of ``Adjusted value'' to read as follows:
Sec. 356.2 Definitions.
* * * * *
Adjusted value means, for an interest component stripped from an
inflation-indexed security, an amount derived by multiplying the
semiannual interest rate by the par amount and then multiplying this
value by 100 divided by the Reference CPI of the original issue date
(or dated date, when the dated date is different from the original
issue date). (See Appendix B, Section IV to this part, for an example
of how to calculate the adjusted value for interest components stripped
from an inflation-indexed security.)
* * * * *
3. Section 356.31 is revised to read as follows:
Sec. 356.31 STRIPS.
(a) General. A note or bond may be designated in the offering
announcement as eligible for the STRIPS program. At the option of the
holder, and generally at any time from its issue date until its call or
maturity, any such security may be ``stripped,'' i.e., divided into
separate principal and interest components. A short or long first
interest payment and all interest payments within a callable period are
not eligible to be stripped from the principal component. The CUSIP
numbers and payment dates for the principal and interest components are
provided in the offering announcement if not previously announced.
(b) Treasury fixed-principal securities--(1) Minimum par amounts
[[Page 35784]]
required for STRIPS. For a fixed-principal security to be stripped into
the components described above, the par amount of the security must be
in an amount that, based on its interest rate, will produce a
semiannual interest payment in a multiple of $1,000. Exhibit C to this
part provides the minimum par amounts required to strip a fixed-
principal security at various interest rates, as well as the
corresponding interest payments. Amounts greater than the minimum par
amount must be in multiples of that amount. The minimum par amount
required to strip a particular security will be provided in the press
release announcing the auction results.
(2) Principal components. Principal components stripped from fixed-
principal securities are maintained in accounts, and transferred, at
their par amount. The principal components have a CUSIP number that is
different from the CUSIP number of the fully-constituted (unstripped)
security.
(3) Interest components. Interest components stripped from fixed-
principal securities are maintained in accounts, and transferred, at
their original payment value, which is derived by applying the
semiannual interest rate to the par amount. When an interest component
is created, the interest payment date becomes the maturity date for the
component. All such components with the same maturity date have the
same CUSIP number, regardless of the underlying security from which the
interest payments were stripped. All interest components have CUSIP
numbers that are different from the CUSIP number of any fully-
constituted security and any principal component.
(c) Treasury inflation-indexed securities--(1) Minimum par amounts
required for STRIPS. The minimum par amount of an inflation-indexed
security that may be stripped into the components described in
paragraph (a) of this section is $1,000. Any par amount to be stripped
above $1,000 must be in a multiple of $1,000.
(2) Principal components. Principal components stripped from
inflation-indexed securities are maintained in accounts, and
transferred, at their par amount. At maturity, the holder will receive
the inflation-adjusted principal value or the par amount, whichever is
greater. (See Sec. 356.30.) The principal components have a CUSIP
number that is different from the CUSIP number of the fully-constituted
(unstripped) security.
(3) Interest components. Interest components stripped from
inflation-indexed securities are maintained in accounts, and
transferred, at their adjusted value, which is derived by multiplying
the semiannual interest rate by the par amount and then multiplying
this value by 100 divided by the Reference CPI of the original issue
date (or dated date, when the dated date is different from the original
issue date). See Appendix B, Section IV to this part, for an example of
how to calculate an adjusted value. The payment value of any interest
component created prior to March 31, 1999, will be converted to its
adjusted value. When an interest component is created, the interest
payment date becomes the maturity date for the component. All such
components with the same maturity date have the same CUSIP number,
regardless of the underlying security from which the interest payments
were stripped. The CUSIP number of any interest component created prior
to March 31, 1999, will be converted to the fungible CUSIP number for
the same maturity date. All interest components have CUSIP numbers that
are different from the CUSIP number of any fully-constituted security
and any principal component. At maturity, the payment to the holder
will be derived by multiplying the adjusted value of the interest
component by the Reference CPI of the maturity date, divided by 100.
See Appendix B, Section IV to this part, for an example of how to
calculate an actual payment amount from an adjusted value.
(4) Rebasing of the CPI. In the event that the CPI is rebased, the
adjusted values of all outstanding inflation-indexed interest
components will be converted to adjusted values based on the new base
reference period. At such time, Treasury will publish information
specifying the manner in which this conversion will be accomplished.
Subsequent to rebasing, any TINTS created from a security that was
issued during a prior base reference period will be issued with
adjusted values calculated using reference CPIs under the most-recent
base reference period.
(d) Reconstituting a security. Stripped interest and principal
components may be reconstituted, i.e., restored to their fully-
constituted form. A principal component and all related unmatured
interest components, in the appropriate minimum or multiple amounts or
adjusted values, must be submitted together for reconstitution.
Interest components stripped from inflation-indexed securities are
different from interest components stripped from fixed-principal
securities and, accordingly, are not interchangeable for reconstitution
purposes.
(e) Applicable regulations. Unless otherwise provided in this part,
notes and bonds stripped into their STRIPS components are governed by
Subparts A, B, and D of Part 357 of this chapter.
4. Appendix B to Part 356 is amended by revising the list of
section headings at the beginning of the Appendix to read as follows:
Appendix B to Part 356--Formulas and Tables
I. Computation of Interest on Treasury Bonds and Notes.
II. Formulas for Conversion of Fixed-Principal Security Yields to
Equivalent Prices.
III. Formulas for Conversion of Inflation-Indexed Security Yields to
Equivalent Prices.
IV. Computation of Adjusted Values and Payment Amounts for Stripped
Inflation-Indexed Interest Components.
V. Computation of Purchase Price, Discount Rate, and Investment Rate
(Coupon-Equivalent Yield) for Treasury Bills.
* * * * *
5. Appendix B to Part 356 is amended by redesignating Section IV as
Section V and adding a new Section IV to read as follows:
* * * * *
IV. Computation of Adjusted Values and Payment Amounts for Stripped
Inflation-Indexed Interest Components
Note: Valuing an interest component stripped from an inflation-
indexed security at its adjusted value enables this interest
component to be interchangeable (fungible) with other interest
components that have the same maturity date, regardless of the
underlying inflation-indexed security from which the interest
components were stripped. The adjusted value provides for
fungibility of these various interest components when buying,
selling, or transferring them, or when reconstituting an inflation-
indexed security.
Definitions
C=the regular annual interest rate, payable semiannually, e.g.,
.03625 (the decimal equivalent of a 3-5/8% interest rate)
Par=par amount of the security to be stripped
Ref CPIIssue Date=reference CPI for the original issue
date (or dated date, when the dated date is different from the
original issue date) of the underlying (unstripped) security
Ref CPIDate=reference CPI for the maturity date of the
interest component
AV=adjusted value of the interest component
PA=payment amount at maturity by Treasury
Formulas
AV=Par (C/2)(100/Ref CPIIssue Date) (rounded to 2
decimals with no intermediate rounding)
PA=AV (Ref CPIDate/100) (rounded to 2 decimals with no
intermediate rounding)
Example. A 10-year inflation-indexed note paying 3\1/2\%
interest is issued on January 15, 1999, with the second interest
payment on January 15, 2000. The Ref CPI on January 15, 1999 (Ref
CPIIssue Date) is 174.62783, and the Ref CPI on January
15, 2000 (Ref CPIDate) is
[[Page 35785]]
179.86159. Calculate the adjusted value and the payment amount at
maturity of the interest component.
Definitions
C=.035
Par=$1,000,000
Ref CPIIssue Date=174.62783
Ref CPIDate=179.86159
Resolution
For a par amount of $1 million, the adjusted value of each
stripped interest component is $1,000,000 (.035/2)(100/174.62783),
or $10,021.31 (no intermediate rounding).
For an interest component maturing on January 15, 2000, the
payment amount is $10,021.31 (179.86159/100), or $18,024.49 (no
intermediate rounding).
* * * * *
6. Exhibit C to Part 356 is amended by revising the heading to read
as follows:
Exhibit C to Part 356--Minimum Par Amounts for Fixed-Principal STRIPS
* * * * *
Dated: June 26, 1998.
Donald V. Hammond,
Acting Fiscal Assistant Secretary.
[FR Doc. 98-17525 Filed 6-29-98; 8:45 am]
BILLING CODE 4810-39-P
