[Federal Register Volume 61, Number 145 (Friday, July 26, 1996)]
[Proposed Rules]
[Pages 39228-39240]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-19040]
[[Page 39227]]
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Part III
Department of the Treasury
_______________________________________________________________________
Fiscal Service
_______________________________________________________________________
31 CFR Part 344
United States Treasury Certificates of Indebtedness, Treasury Notes,
and Treasury Bonds--State and Local Government Series; Proposed Rule
Federal Register / Vol. 61, No. 145 / Friday, July 26, 1996 /
Proposed Rules
[[Page 39228]]
DEPARTMENT OF THE TREASURY
Fiscal Service
31 CFR Part 344
[Department of the Treasury Circular, Public Debt Series No. 3-72]
Regulations Governing United States Treasury Certificates of
Indebtedness, Treasury Notes, and Treasury Bonds--State and Local
Government Series
AGENCY: Bureau of the Public Debt, Fiscal Service, Treasury.
ACTION: Proposed rule.
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SUMMARY: The Department of the Treasury hereby publishes a proposed
rule governing United States Treasury Certificates of Indebtedness,
Notes, and Bonds of the State and Local Government Series (SLGS). These
securities are available for purchase by issuers of state and local
government bonds described in section 103 of the Internal Revenue Code
for proceeds (or amounts treated as proceeds) which are subject to
yield restrictions or arbitrage rebate requirements of the Income Tax
regulations under sections 103, 148, 149 and 150 of the Internal
Revenue Code (tax regulations). This document proposes changes to make
the SLGS securities program more flexible.
DATES: Comments must be received on or before August 26, 1996.
ADDRESSES: Copies of this proposed rule have also been made available
for downloading from the Bureau of the Public Debt home page at the
following address:
http://www.ustreas.gov:treasury/bureaus/pubdebt/pubdebt.html
Comments should be sent to: Division of Special Investments, Bureau of
the Public Debt, Department of the Treasury, 200 3rd St., P.O. Box 396,
Parkersburg, WV 26101-0396. Comments received will be available for
public inspection and downloading on the Internet and for inspection
and copying at the Treasury Department Library, FOIA Collection, Room
5030, Main Treasury Building, 1500 Pennsylvania Avenue NW, Washington,
D.C. 20220. Persons wishing to visit the library should call 202-622-
0990 for an appointment. Comments may also be sent through the Internet
to Fred Pyatt, Director, or Howard Stevens, Supervisory Program
Analyst, Division of Special Investments at fpyatt@bpd.treas.gov or
hstevens@bpd.treas.gov. When sending comments by Internet, please
provide your full name and mailing address.
FOR FURTHER INFORMATION CONTACT: Fred Pyatt, Director, or Howard
Stevens, Supervisory Program Analyst, Division of Special Investments,
at 304-480-7752 or Ed Gronseth, Deputy Chief Counsel, or Jim Kramer-
Wilt, Attorney/Adviser, Office of the Chief Counsel, at 304-480-5190.
SUPPLEMENTARY INFORMATION:
I. Background.
The Department of the Treasury, Bureau of the Public Debt, is
attempting to make the SLGS securities program more attractive and
flexible for State and local government issuers of debt obligations
that are subject to the arbitrage and rebate rules of the Internal
Revenue Code. It is the Department's intent to do so in a manner
consistent with tax policy objectives and in a manner that is cost
effective.
In recent years, market participants have advised the Department
that aspects of the existing SLGS securities regulations impose burdens
that are not needed or cost effective. On April 30, 1996, the
Department published an Advanced Notice of Proposed Rulemaking, noting
several changes the Department was considering in order to make the
SLGS securities program more flexible. The changes under consideration
were to: (1) Eliminate the ``all or nothing'' certification, (2)
provide for subscriptions and redemptions in increments of less than
$100 above the $1,000 minimum, (3) reduce the minimum maturity for zero
interest certificates of indebtedness, (4) reduce the time for advance
notice between subscription and issue date for time deposit and special
zero interest SLGS securities, (5) make SLGS securities pricing more
consistent with open market Treasury securities, (6) permit SLGS
securities to be purchased with funds subject to rebate as well as
yield restriction, (7) revise the demand deposit program, (8) change
the formula for determining the redemption value of SLGS securities,
including eliminating the restriction against premium redemption, (9)
permit zero interest time deposit SLGS securities to be redeemed
without penalty; and lastly, (10) permit the purchase of SLGS
securities with the proceeds of previously redeemed SLGS securities or
with open market Treasury securities.
There were eight letters received commenting on the Advanced Notice
of Proposed Rulemaking (ANPR). In general, the comments were in favor
of the ten items contained in the ANPR. Several comments suggested
specific parameters for some of the ten items while others suggested
the Treasury Department consider changes not contained in the ANPR.
Following is a summary of the issues addressed in the comments and an
explanation of the action taken with respect to each comment.
Proposal No. 1--The Department proposed the elimination of the
``all or nothing'' certification which requires all yield restricted
investments be invested either all in SLGS securities or all in open
market Treasury securities. All comments were strongly in favor of the
elimination of the ``all or nothing'' certification. The Department has
included this proposal in the proposed rule.
Proposal No. 2--The Department proposed to allow subscriptions for
time deposit SLGS securities in increments of less than $100 above the
$1,000 minimum investment and to permit partial redemptions in
increments of less than $100, so long as an account balance is at least
$1,000 after partial redemption. Most comments were in favor of these
items. One comment stated there would be an increased administrative
burden on agent banks and on the Department. The Department has
determined to make these changes which would result in a more flexible
program. Please refer to the comment on the elimination of the special
zero interest securities following Proposal No. 10.
One comment suggested the Department reduce the $1,000 minimum
investment now required. The Department has determined that $1,000 is a
reasonable minimum amount in light of the nature of the SLGS securities
program and is not including this suggestion in the proposed rule.
Proposal No. 3--The Department proposed to reduce the minimum
maturity for zero interest time deposit certificates of indebtedness.
All comments were in favor of this item and the Department is proposing
a reduction from thirty to fifteen days for zero interest time deposit
securities. One comment urged the Department to make all SLGS
securities available in any maturity. The Department has determined
that pricing interest bearing SLGS securities of less than thirty days
maturity is not feasible, given the volatility of the market. The
Department has also decided not to reduce the minimum maturity of zero
interest SLGS securities to fewer than fifteen days due to operational
constraints. Please refer to the comment on the elimination of special
zero interest securities following Proposal No. 10.
Proposal No. 4--The Department proposed to reduce the time between
the date of subscription and the date of issue for time deposit SLGS
securities. All comments were in favor of this item.
[[Page 39229]]
One comment suggested that the time be reduced to no longer than five
business days. Accordingly, the Department is proposing a minimum
notification of five days for subscriptions of $10 million or less and
a minimum notification of seven days for subscriptions of over $10
million.
Proposal No. 5--The Department proposed a reduction of the twelve
and one-half basis points differential between SLGS securities rates
and rates of similar Treasury securities in the open market. All
comments were in favor of this item except one that recommended it
remain unchanged. There were specific suggestions on the basis point
differential ranging from zero to five. The Department is proposing the
basis point differential be reduced to five basis points.
Proposal No. 6--The Department proposed investors be able to
purchase SLGS securities with funds subject to rebate as well as yield
restrictions. All comments were in favor of this item. The Department
will include this item in the proposed rule. Other comments suggested:
(a) Replace all eliminated certifications with a gross proceeds
certification under Section 1.148-1(b) of the Income Tax regulations.
(b) Allow all gross proceeds to be invested in SLGS securities.
(c) Offer an instrument similar to a Guaranteed Investment Contract
and provide for automatic reinvestment of SLGS securities.
With respect to (a) and (b) above, the Department is proposing to
remove all certifications from these regulations, including a gross
proceeds certification. The Department believes that the nature and
general scope of the program as described in Section 344.0(a) limits
investment in SLGS securities to gross proceeds of tax-exempt bonds.
With respect to (c), the Department believes that other changes
being proposed to improve the SLGS program will address issuers'
concerns about reinvestment risks. In addition, under this proposed
rule, for example, an issuer would be able to make reinvestments and to
invest interest payments at the current rate, provided it follows the
revised notice requirements. Please refer to Proposal No. 10. The
Department has determined not to offer products similar to Guaranteed
Investment Contracts under the proposed rule.
Proposal No. 7--The Department proposed revising the SLGS Demand
Deposit program by adjusting the rate formula and by eliminating
certifications that are duplicative of current tax regulations or could
be better administered through the tax regulations. One comment
suggested the program be eliminated altogether. This program is
congressionally mandated, however, and the Department is therefore
proposing to make it more attractive and easier to use. Specifically,
the Department is proposing to eliminate the certifications and to
reduce the Treasury administrative cost in the rate formula. Also, the
Department is proposing to remove the $35 million dollar cap on
investments in the Demand Deposit program.
In order to facilitate the administration of the Demand Deposit
program under the flexible rules proposed, for subscriptions of more
than $10 million, Public Debt must receive the required notice between
the date of subscription and date of issue in no less than seven days,
rather than the present required notice period of three days. Receipt
of notice by Public Debt between date of subscription and date of issue
for subscriptions of less than $10 million would be increased to five
days.
Proposal No. 8--The Department proposed to change the formula for
determining the redemption value of SLGS securities in a manner which
could result in a premium for the subscriber in cases where the
Treasury borrowing rate is lower than the stated interest rate of the
SLGS security. All comments were in favor of this change. The
Department is proposing to change the formula in a manner that could
result in a premium upon redemption. There were five specific
suggestions on this item:
(a) The new redemption formula should be made available for SLGS
securities issued prior to September 1, 1989. The Department has
considered the suggestion and has decided not to change formulas that
apply to previously purchased SLGS securities.
(b) Change the current irrevocability of an early redemption notice
to one where a six-month early redemption penalty results. The
Department has determined that a six-month penalty would not be an
adequate deterrent to the revocation of an early redemption notice. An
issuer should not be harmed by the retention of this penalty as it
would be able to roll over its investments.
(c) Reduce the minimum holding period for time deposit notes and
bonds, before allowing an early redemption, from one year to thirty
days or less. The Department is adopting this suggestion and proposes
to permit thirty days as a minimum period for holding time deposit
notes and bonds.
(d) In redemption calculations, take into consideration the maximum
interest rate that an issuer could have subscribed for, instead of the
actual rate on the outstanding security. The purpose of the redemption
formula is to make the Department whole. This suggestion would be
inconsistent with this purpose. In addition, issuers would have the
flexibility to mix zero interest SLGS securities with either open
market securities or with SLGS securities bearing the maximum rate.
This should eliminate the problems commenters have cited. For these
reasons, the Department is not incorporating this suggestion into the
new formula.
(e) Address the issue of whether a premium constitutes proceeds and
how the premium should be treated for yield purposes. The issue
identified in this suggestion is more appropriately determined under
Section 148 of the tax regulations.
Proposal No. 9--The Department proposed to allow zero interest time
deposit SLGS securities to be redeemed early at par. All comments were
in favor of this item. The Department has included this item in the
proposed rule for zero interest time deposit SLGS securities.
Proposal No. 10--The Department proposed to permit the purchase of
SLGS securities with the proceeds of previously redeemed SLGS
securities or open market Treasury securities. All comments were in
favor of this item. The Department is proposing to permit the purchase
of SLGS securities with proceeds of previously redeemed SLGS securities
or open market Treasury securities.
Discontinuing the Issuance of Special Zero Interest Securities
The Department is proposing to discontinue the issuance of special
zero interest securities. Special zero interest securities were
instituted to allow issuers to blend special zero interest securities
with above-yield open market investments in instances where proceeds
became subject to yield restrictions at some date after the issuance of
the bonds. The current regulations provide that special zero interest
securities may be redeemed without penalty as a further accommodation
to the types of situations where this program could be used.
Under the proposed rule, zero interest bearing time deposit
securities would now be made available for purposes of rebate
compliance, could be in the same escrow as open market investments, and
could be redeemed early without penalty.
In addition, the tax regulations provide issuers with the ability
to make
[[Page 39230]]
``yield reduction payments'' for certain yield-restricted investments
that are invested over the yield on the bonds. Yield reduction payment
provisions cover virtually all instances when an issuer would use
special zero interest securities, greatly reducing the need for this
program.
Therefore, there seems to be no reason to continue the issuance of
special zero interest securities. The provisions for redemption of
these securities would remain to govern the issues of special zero
interest securities still outstanding.
Additional Comments
Other comments received, not pertaining to the ten items in the
ANPR, suggested the Department make further changes to the SLGS
securities program as follows:
(a) Issue zero coupon deep discount bills, notes and bonds for
which the issuer could specify the maturity date. Interest on these
securities would accrue and be paid at maturity. The Department is
revising its SLGS computer system which currently is not capable of
handling such securities. The Department is not including this
suggestion in the proposed rule at this time, but will reconsider this
suggestion in the future when its revised computer system is
implemented. Until then, there should be little inconvenience because
purchasers can satisfy their requirements by purchasing deep discount
zero coupon securities in the open market.
(b) Replace the penalty for revocation of the issuance of a SLGS
security under Section 344.1(f)(3) (a six-month prohibition against
subscribing for SLGS securities) with a monetary penalty. The
Department has determined the six-month penalty is an adequate
deterrent for non-settlement of a SLGS subscription and is not
including this suggestion in the proposed rule.
(c) Offer to bid and supply a portfolio of open market Treasury
securities in circumstances where SLGS securities are not a viable
investment alternative. The Department has determined that with all the
changes proposed, SLGS securities are a viable investment. The
Department is not including this suggestion in the proposed rule.
(d) Amend Section 344.3(b)(3) to permit the acceleration, as well
as the postponement of, the delivery dates of SLGS securities within
administratively acceptable time limits. The Department has determined
this suggestion has been sufficiently addressed in Proposal No. 4.
(e) Revise the procedures to be followed when the sale of SLGS
securities is suspended due to a debt ceiling limit and include an
automatic waiver under Section 344.4 of all penalties for cancellation
of a subscription. Due to varying circumstances in the event of a debt
ceiling limit, the Department needs flexibility to deal with the
various issues that arise during periods when sales are suspended due
to debt ceiling limitations and has decided not to incorporate this
suggestion in the proposed rule. Treasury, however, has never failed to
deliver SLGS securities for subscriptions already accepted due to debt
ceiling limitations.
(f) Make current SLGS securities interest rates, SLGS securities
regulations and historical SLGS securities rates available on the
Internet, or some other ``free'' resource, rather than on the Commerce
Department's Economic Bulletin Board. The Department is currently
exploring the dissemination of such information by electronic means and
will address this issue in the future. In the meantime these rates are
now provided free by phone or fax by the Division of Special
Investments, Bureau of the Public Debt, by calling its automated fax at
(304) 480-7548 or by calling (304) 480-7752.
(g) Permit the filing of electronic subscriptions. The Department
is considering the electronic filing of subscriptions as a part of its
computer system redesign now in progress. This suggestion will be
addressed in a subsequent regulation.
(h) Clarify who is to be listed as the ``beneficial owner'' for
purposes of 31 CFR Part 306. The proposed rule clarifies that for
purposes of this Section, the ``beneficial owner'' in Sections 344.0(b)
and 344.3(b)(1), whose Tax Identification Number is used, is the state
or local government entity, not the trustee or conduit borrower. The
six-month penalty for cancellation would therefore be applied to the
state or local government entity.
(i) Modify the initial subscription requirements to require certain
identifying characteristics of the source of proceeds to be invested so
that in the event of a failure to settle, only those subscriptions for
the same proceeds are precluded, rather than the Department
``blacklisting'' any subscription submitted under that Taxpayer
Identification Number. The Department has determined that monitoring
such proceeds would not be administratively feasible and that a six-
month penalty is an adequate deterrent appropriately applied at the
issuer level. The Department is therefore not including this suggestion
in the proposed rule.
(j) Make SLGS securities transferrable. The Department has
considered the general issue of transferability and does not intend to
change the prohibition against transfer now found in Section 344.1(b).
To the extent this suggestion of transferability refers to the transfer
of an account, such as a reserve fund investment, by an issuer from one
bond issue to another bond issue of that subscriber under the same
Taxpayer Identification Number, or between accounts of different
security types, i.e., demand deposit to time deposit (as now prohibited
by Section 344.1(c)), or from one trustee to another, the clarification
of the beneficial owner should address the concern of the commenter.
The Department however invites further comments on this suggestion.
(k) Permit an issuer to notify the Bureau of the Public Debt that
it is pricing a transaction for which it intends to invest in SLGS
securities and thereby lock in the day's SLGS securities rate for a
period of up to three days. The Department has determined Proposal No.
4 sufficiently addresses this suggestion. Subscribers for $10 million
or less must give at least five days notice and subscribers for more
than $10 million must give seven days notice.
(l) Eliminate the 10-year maximum maturity on special zero interest
SLGS securities and eliminate any restrictions on their use, thereby
making it the only zero yielding SLGS security. The Department has
proposed to discontinue the issuance of special zero interest SLGS
securities. Please refer to the expanded comment on this issue
following Proposal No. 10.
(m) Permit an issuer to restructure its SLGS portfolio by
exchanging purchased SLGS securities for ones with similar cash flows.
The Department has determined the proposal to allow easing of the early
redemption rules for SLGS securities and the rollovers of investments
in SLGS securities with previously redeemed SLGS securities would
increase an issuer's flexibility in restructuring its portfolio. The
Department is not including this suggestion in the proposed rule.
(n) Allow the forward purchase of SLGS securities more than the
currently permitted sixty days in Section 344.4. The Department has
determined the flexibility provided in this proposed rule is
sufficient. The Department has determined the benefit to the market is
insufficient to overcome the administrative burden on the Department of
maintaining subscription requests for a lengthy period and is not
including this suggestion in the proposed rule.
(o) Pay issuers the redemption value of matured SLGS securities by
1:00 p.m. on the date of maturity. The Department
[[Page 39231]]
makes ACH payments available to the Federal Reserve Banks in time for
posting at the commercial banks at the opening of the business day on
the date of maturity. As the suggestion of a 1:00 p.m. payment on
maturity date is now being met by the Department, it will not be
included in the proposed rule.
(p) The final comment raised several issues related to the yield
restriction and rebate rules as they apply to pooled loan programs. The
Department believes the changes to the SLGS program in the proposed
regulations would assist issuers of pooled loan bonds. Other
suggestions would be more appropriately dealt with in the tax
regulations.
As a result of these comments and decisions within the Treasury
Department, this is being published in proposed form to give market
participants an additional comment period.
II. Section By Section Summary
Subpart A--General Information
Provisions included in the general information section apply to
time deposit and demand deposit State and Local Government Series
securities. Proposed changes from the 1995 regulations are as follows:
Subpart A--General Information
(1) Section 344.0(b)--This section would be changed to redefine the
term ``government body'' to make it clear SLGS securities are issued
only to state and local governments and not to conduit borrowers.
(2) Section 344.0(d)--A new section would be added to indicate that
time deposit SLGS securities would be issued in a minimum amount of
$1,000, or in any increments of not less than $1.00. Demand Deposit
securities could be issued in any increment over the $1,000 minimum.
(3) Section 344.1(a)--This section would be changed to note that
copies of the circular may be obtained from the Division of Special
Investments.
(4) Section 344.1(h)--A new section would be added on noncompliance
which applies to all subparts and the present noncompliance section in
each subpart would be deleted. This section also clarified that late
payment fees and administrative fees are due on demand.
(5) Section 344.1(i)--Another general section would be added,
titled General Redemption Provisions, stating a security may not be
called for redemption by the Secretary of the Treasury prior to
maturity. If a security is scheduled for redemption on a non-business
day, it would be redeemed on the next business day. This section would
apply to all subparts and duplications of this section that exist in
the present regulations would be deleted.
(6) Section 344.1(j)--A new section would be added to clarify that
any reference to days refers to calendar days, unless otherwise noted.
Subpart B--Time Deposit Securities
(1) Section 344.2(a)(1)--The reference to the $1,000 minimum would
be deleted as it would be covered in 344.0(d). Section 344.0(d) would
also state that increments above the minimum amount could be purchased
for not less than $1.00 for time deposit securities. The minimum
maturity period for zero percent certificates of indebtedness would be
reduced from thirty days to fifteen days.
(2) Section 344.2(a)(2)--The reference to the $1,000 minimum amount
and the $100 increment above this amount would be deleted as it would
be covered in the new general section, 344.0(d).
(3) Section 344.2(a)(3)--The reference to the $1,000 minimum amount
and the increment above this amount would be deleted as it would be
covered in a new general section, 344.0(d).
(4) Section 344.2(b)--The last sentence of this section would state
the rates specified in the tables are five basis points below the then
current estimated Treasury borrowing rate for a security of comparable
maturity. Section 344.2(c)(2) would clarify that the Department may
employ alternative methods of payment other than by ACH.
(5) Section 344.2(c)(2)--This section would be amended to provide
for payment of redemptions prior to maturity by Fedwire.
(6) Section 344.3(b)(1)--This section would be amended to indicate
that subscriptions must be received by Public Debt at least five days
prior to issue date for subscriptions of $10 million or less and seven
days for subscriptions of more than $10 million. Subscriptions of $10
million or less could be canceled without penalty up to five days
before the date of issuance. Subscriptions of more than $10 million
could be canceled without penalty up to seven days before the date of
issuance.
This section would also note that a subscription sent in letter
form would not be accepted unless it provided the Tax Identification
Number of the government body.
In the example of an initial subscription in letter form, the words
``or other entity'' have been deleted to emphasize that the proper Tax
Identification Number to insert is that of the state or local
government owner, not that of a trustee bank or a conduit borrower.
(7) Section 344.3(b)(4)--This section would be revised to read that
no initial subscription would be required where a final subscription is
received at least five days before the issue date for subscriptions of
$10 million or less and at least seven days before the issue date for
subscriptions of over $10 million.
(8) Section 344.3(c)--This section would be amended to eliminate
all certifications other than (3), which is being revised. The ``all or
nothing'' rule of the certification in (1) Is being eliminated to
facilitate the use of the time deposit securities for investment of
proceeds that are subject to arbitrage rebate. This change in the
proposed regulations should alleviate some of the need to calculate
rebate if funds can be invested at the bond yield for a longer term. In
general, to the extent that the certifications were a result of
concerns about abuse of the tax regulations and the SLGS program, the
Department has determined that the yield restriction and rebate rules
are more appropriately enforced under the tax regulations. (In cases of
abuse of the tax regulations which also involve SLGS securities, these
enforcement efforts may be supplemented by the Secretary's authority
under section 344.1(f) to revoke subscriptions.) The certification in
(3) would be revised to apply only to SLGS securities purchased prior
to December 27, 1976. Certifications in (4) would be eliminated because
of certain prior changes to the SLGS securities regulations (such as
the change to daily SLGS securities rates), and because of proposed
changes to the early redemption penalties under section 344.5,
contained in these proposed regulations. Additionally, the word
``beneficial owner'' is being changed to ``government body'' to make it
clear that the proper Tax Identification Number to be used is that of
the government entity.
(9) Section 344.4 General.--This section would be amended to state
that the issue date of a subscription may not exceed by more than sixty
days the date the subscription was received by Public Debt.
(10) Section 344.4(b)--This section would be eliminated as it is
now covered in the general provisions applicable to all SLGS
securities, 344.0(h).
(11) Section 344.5(a)--This section would be eliminated as it would
be covered in the general provisions applicable to all SLGS securities,
344.0(i).
(12) Section 344.5(a)(2)--The word ``subscriber'' is being changed
to ``government body'' to make it clear that
[[Page 39232]]
the proper Tax Identification Number to be used is that of the
government entity.
(13) Section 344.5(b)(1)--This section would be amended to provide
that zero interest certificates may be redeemed before maturity at the
owner's option no earlier than fifteen days before maturity for
certificates of fifteen to twenty-nine days duration and no earlier
than thirty days after the issue date in the case of a note or bond.
(14) Section 344.5(b)(2)--This section would be amended to change
the word ``subscriber'' to ``state or local government body owner'' in
the 3rd sentence of this section. This section would further be amended
to read that notice of redemption must be received by Public Debt no
less than ten days before the requested redemption date, rather than
the current fifteen-day requirement.
(15) Section 344.5(b)(3)--This would be a new section which
provides for the calculation of redemption proceeds for SLGS securities
purchased on or after the effective date of the final rule. This
section would change the formula for determining the early redemption
value of SLGS securities to one where the remaining interest and
principal payments are discounted by the current Treasury borrowing
rate for the remaining term to maturity of the security being redeemed.
This would result in a premium in cases where the Treasury
borrowing rate is lower than the stated interest rate of the SLGS
securities. This section would further refer to Appendix B at the end
of Part 344 for the calculation of the formula.
This section would also read that there would be no market charge
for zero interest time deposit securities. The redemption proceeds for
a zero interest security would therefore be a return of the principal
invested.
Subpart C--Demand Deposit Securities
(1) Section 344.5(a)--This section would be revised to delete the
reference to a $1,000 minimum investment as this would be covered in
the new general section, 344.0(d).
(2) Section 344.6(b)(2)(i)--The Department intends to publish a
Federal Register notice when the SLGS securities regulations are
finalized providing the marginal tax rate and the Treasury
Administrative Cost (TAC) to be used in the demand deposit program. A
reduction in the TAC similar to the reduction to five basis points is
contemplated in the differential between time deposit SLGS security
rates and rates on similar Treasury securities in the open market.
(3) Section 344.7(a)--This section would be amended by stating that
subscriptions for $10 million or less must be received by Public Debt
at least five days prior to the date of issue and would require that
subscriptions over $10 million be received by Public Debt at least
seven days prior to the date of issue.
(4) Section 344.7(c)(1)--This section would be removed since under
the proposed rule, the $35 million cap on issues of demand deposit
securities would be eliminated.
(5) Section 344.7 (c)(2) through (c)(5)--These certifications would
be eliminated because they can be administered more effectively under
the tax regulations of Section 148 of the Internal Revenue Code. The
tax regulations would be amended to reflect the transfer of these
certifications (to the extent not already covered by the tax
regulations).
(6) Section 344.8(b)--This section would be eliminated as it would
be covered in the general section applicable to all SLGS securities,
344.1(h).
(7) Section 344.9(a)--This section will be amended to provide for
redemption payments by Fedwire.
(8) Section 344.9(b)--This section would be amended to state that
notice of redemptions for subscriptions of more than $10 million must
be received at least three business days prior to the scheduled date of
redemption. Redemption notice for subscriptions of $10 million or less
would remain unchanged at one business day.
(9) Section 344.9(c)--This section will be eliminated as the rules
regarding expenditure of proceeds are covered by the tax regulations.
Subpart D--Special Zero Interest Securities
(1) Section 344.10--This section would be amended to add that the
Department has discontinued the issuance of this type of security as of
the effective date of the final rule. The proposed amendment to the
time deposit security subpart, which would permit investment for rebate
and yield restriction purposes, would eliminate the need for a separate
Special Zero Interest Program. Under the proposed revisions, the
following sections of this Subpart would apply only to special zero
interest securities issued before the effective date of the final rule.
Subpart B, governing time deposit securities, would be changed in a
manner that permits time deposit zero interest securities to be
redeemed without penalty. Investors that hold special zero interest
securities issued prior to the effective date of the final rule would
be able to redeem these securities without penalty.
(2) Section 344.11--This section would be eliminated.
(3) Section 344.12--This section would be eliminated.
(4) Section 344.13--This section would now become Section 344.11
and remain in effect for the special zero interest accounts now
outstanding. The minimum holding period for redeeming a note after
issue date would be changed from one year to thirty days. The word
``subscriber'' will be changed to ``government body'' to clarify that
the proper Tax Identification Number to be used is that of the
government entity. Redemption notices must be received by Public Debt
within the proscribed limits.
Appendix A to Part 344--There would be a clarifying statement that
these formulas apply to SLGS securities issued before the effective
date of the final rule.
Appendix B to Part 344--There would be a new formula in this
section for determining the redemption value for all early redeemed
time deposit SLGS securities. This formula would reflect the change
that the remaining interest and principal payments are discounted by
the Treasury borrowing rate for the remaining term to maturity of the
security being redeemed. This would result in a premium in cases where
the Treasury borrowing rate is lower than the stated interest rate of
the SLGS security.
Procedural Requirements
It has been determined this proposed rule is not a significant
regulatory action as defined in Executive Order 12866. Therefore, an
assessment of anticipated benefits, costs and regulatory alternatives
is not required.
Although this rule is being issued to secure the benefit of public
comment, the rule relates to matters of public contract, as well as the
borrowing power and fiscal authority of the United States. The notice
and public procedures requirements of the Administrative Procedure Act
are inapplicable, pursuant to 5 U.S.C. 553(a)(2). As no notice of
proposed rulemaking was required, the provisions of the Regulatory
Flexibility Act (5 U.S.C. 601 et seq.) do not apply.
The proposed rule does not alter the collection of information
previously reviewed and approved by the Office of Management and
Budget, in accordance with the requirements of the Paperwork Reduction
Act (44 U.S.C. 3507) under control number 1535-0091. The principal
purpose of the proposed rule
[[Page 39233]]
is to make the SLGS securities program more attractive and flexible for
investors. The revision would not impose a new collection of
information requirement.
List of Subjects in 31 CFR Part 344
Bonds, Government securities, Securities.
Dated: July 22, 1996.
Gerald Murphy,
Fiscal Assistant Secretary.
For the reasons set forth in the preamble, part 344 of title 31 of
the Code of Federal Regulations is proposed to be revised to read as
follows:
PART 344--REGULATIONS GOVERNING UNITED STATES TREASURY CERTIFICATES
OF INDEBTEDNESS, TREASURY NOTES, AND TREASURY BONDS--STATE AND
LOCAL GOVERNMENT SERIES
Subpart A--General Information
Sec.
344.0 Offering of securities.
344.1 General provisions.
Subpart B--Time Deposit Securities
344.2 Description of securities.
344.3 Subscription for purchase.
344.4 Issue date and payment.
344.5 Redemption.
Subpart C--Demand Deposit Securities
344.6 Description of securities.
344.7 Subscription for purchase.
344.8 Issue date and payment.
344.9 Redemption.
Subpart D--Special Zero Interest Securities
344.10 General.
344.11 Redemption.
Appendix A to Part 344--Early Redemption Market Charge Formulas and
Examples for Subscription from September 1, 1989, through [date of
publication of final rule]
Appendix B to Part 344--Formula for Determining Redemption Value
for Securities Purchased and Early-Redeemed After [date of publication
of final rule]
Authority: 26 U.S.C. 141 note; 31 U.S.C. 3102 et seq.,
Subpart A--General Information
Sec. 344.0 Offering of securities.
(a) In order to provide issuers of tax exempt securities with
investments which allow them to comply with yield restriction and
arbitrage rebate provisions of the Internal Revenue Code, the Secretary
of the Treasury offers for sale the following State and Local
Government Series securities:
(1) Time deposit securities:
(i) United States Treasury Certificates of Indebtedness;
(ii) United States Treasury Notes; and
(iii) United States Treasury Bonds.
(2) Demand deposit securities--United States Treasury Certificates
of Indebtedness.
(b) As appropriate, the definitions of terms used in part 344 are
those found in the relevant portions of the Internal Revenue Code and
the tax regulations. The term ``government body'' refers to issuers of
state or local government bonds described in section 103 of the
Internal Revenue Code.
(c) The securities in paragraph (a) of this section will be issued
in a minimum amount of $1,000, or in any larger amount in increments of
not less than $1.00 for time deposit securities and in any increments
over the $1,000 minimum for demand deposit securities above the stated
minimum.
(d) This offering will continue until terminated by the Secretary
of the Treasury.
Sec. 344.1 General provisions.
(a) Regulations. United States Treasury securities--State and Local
Government Series shall be subject to the general regulations with
respect to United States securities, which are set forth in the
Department of the Treasury Circular No. 300 (31 CFR part 306), to the
extent applicable. Copies of the circular may be obtained from the
Bureau of the Public Debt, Division of Special Investments--Room 309,
200 Third Street, P.O. Box 396, Parkersburg, WV 26102-0396, or a
Federal Reserve Bank or Branch.
(b) Issuance. The securities will be issued in book-entry form on
the books of the Department of the Treasury, Bureau of the Public Debt,
Parkersburg, WV. Transfer of securities by sale, exchange, assignment,
pledge, or otherwise is not permitted.
(c) Transfers. Securities held in an account of any one type, i.e.,
time deposit, demand deposit, or special zero interest, may not be
transferred within that account or to an account of any other type.
(d) Fiscal agents. Selected Federal Reserve Banks and Branches, as
fiscal agents of the United States, may be designated to perform such
services as may be requested of them by the Secretary of the Treasury
in connection with the purchase of, transactions involving, and
redemption of, the securities.
(e) Authority of subscriber. Where a commercial bank submits an
initial or final subscription on behalf of a government body, it must
certify it is acting under the latter's specific authorization.
Ordinarily, evidence of such authority will not be required.
Subscriptions submitted by an agent other than a commercial bank must
be accompanied by evidence of the agent's authority to act. Such
evidence must describe the nature and scope of the agent's
authorization, must specify the legal authority under which the agent
was designated, and must relate by its terms to the investment action
being undertaken. Subscriptions unsupported by such evidence will not
be accepted.
(f) Reservations. Transaction requests, including requests for
subscription and redemption, will not be accepted if unsigned,
inappropriately completed, or not timely submitted. Any of these
actions shall be final. The authority of the Secretary to waive
regulations under 31 CFR 306.126 applies to part 344. The Secretary of
the Treasury reserves the right:
(1) To reject any application for the purchase of securities under
this offering;
(2) To refuse to issue any such securities in any case or any
class(es) of cases; and
(3) To revoke the issuance of any security, and to declare the
subscriber ineligible thereafter to subscribe for securities under this
offering, if:
(i) Any security is issued on the basis of an improper
certification or other misrepresentation by the subscriber (other than
as the result of an inadvertent error),
(ii) The issuance of any security is in conjunction with a
violation of the tax regulations, as determined by the Internal Revenue
Service or
(iii) The Secretary deems such action to be in the public interest.
(g) Debt limit contingency. The Department of the Treasury reserves
the right to change or suspend the terms and conditions of this
offering, including provisions relating to subscriptions for, and
issuance of, securities, interest payments, redemptions, and rollovers,
as well as notices relating hereto, at any time the Secretary
determines that issuance of obligations sufficient to conduct the
orderly financing operations of the United States cannot be made
without exceeding the statutory debt limit. Announcement of such
changes shall be provided by such means as the Secretary deems
appropriate.
(h) Noncompliance. The penalty imposed on any government body which
fails to make settlement on a subscription once submitted and not
canceled timely shall be to render the government body ineligible
thereafter to subscribe for securities under any offering in part 344
for a period of six
[[Page 39234]]
months, beginning on the date the subscription is withdrawn or the
proposed issue date, whichever occurs first. The Division of Special
Investments may determine to waive the six-month penalty, pursuant to
the provisions governing the waiver of regulations set forth under 31
CFR 306.126. Where settlement occurs after the proposed issue date and
the Division of Special Investments determines, pursuant to 31 CFR
306.126, that settlement is acceptable on an exception basis, the six-
month penalty will be waived and the government body shall be subject
to a late payment assessment. The late payment assessment will equal
the amount of interest that would have accrued on the securities from
the proposed issue date to the date of settlement, as well as an
administrative fee of $100 per subscription. Assessments of late
payment fees and administrative fees under part 344 are due on demand.
(i) General redemption provisions. A security may not be called for
redemption by the Secretary of the Treasury prior to maturity. Upon the
maturity of a security, the Department will make payment of the
principal amount and interest due to the owner thereof. A security
scheduled for redemption on a non-business day will be redeemed on the
next business day.
(j) Unless otherwise noted, any reference herein to days refers to
calendar days.
Subpart B--Time Deposit Securities
Sec. 344.2 Description of securities.
(a) Terms. (1) Certificates will be issued with maturity periods
fixed by the government body, from thirty days up to and including one
year, or for any intervening period; provided, for certificates that
bear no interest, the maturity period may be fixed by the government
body from fifteen days up to and including one year or for any
intervening period.
(2) Notes. The notes will be issued with maturity periods fixed by
the government body, from one year and one day up to and including ten
years, or for any intervening period.
(3) Bonds. The bonds will be issued with maturity periods fixed by
the government body, from ten years and one day up to and including
thirty years, or for any intervening period.
(b) Interest rate. Each security shall bear such rate of interest
as the government body shall designate, but the rate shall not exceed
the maximum interest rate. The applicable maximum interest rates for
each day shall equal rates shown in a SLGS securities rate table, which
will be released by the Department to the public by 10:00 a.m., Eastern
time, each business day. If the Department finds that due to
circumstances beyond its control the rates will not be available to the
public by 10:00 a.m., Eastern time, on any given business day, the
applicable interest for the last preceding business day shall apply.
The applicable rate table for any subscription is the one in effect on
the date the initial subscription is received at Public Debt.
Subscriptions received on a non-business day will be subject to those
interest rates which are in effect for the next business day. The rates
specified in the tables are five basis points below the then current
estimated Treasury borrowing rate for a Treasury security of comparable
maturity and may be found by investors in the Commerce Department's
Economic Bulletin Board or may be obtained from the Division of Special
Investment's automated fax at (304)480-7548 or by calling (304) 480-
7752.
(c) Payment. (1) Interest computation and payment dates. Interest
on a certificate will be computed on an annual basis and will be paid
at maturity with the principal. Interest on a note or bond will be paid
semi-annually. The government body will specify the first interest
payment date, which must occur any time between thirty days and one
year of the date of issue, and the final interest payment date must
coincide with the maturity date of the security. Interest for other
than a full semi-annual interest period is computed on the basis of a
365-day or 366-day year (for certificates) and on the basis of the
exact number of days in the half-year (for notes and bonds). See
appendix to subpart E of Part 306 of this chapter for rules regarding
computation of interest.
(2) Method of payment. Payment may be made by the Automated
Clearing House method (ACH) for the owner's account at a financial
institution designated by the owner. Redemptions prior to maturity will
be paid by Fedwire. To the extent applicable, provisions of Sec. 357.26
on ``Payments,'' as set forth in 31 CFR part 357 and provisions of 31
CFR part 370, shall govern ACH payments made under this offering. The
Department of the Treasury may employ alternate payment procedures,
instead of ACH, in any case, or class of cases where operational
considerations necessitate such action.
Sec. 344.3 Subscription for purchase.
(a) Subscription requirements. Subscriptions for purchase of
securities under this offering must be submitted to the Division of
Special Investments, Bureau of the Public Debt, 200 Third Street, P.O.
Box 396, Parkersburg, WV 26102-0396. Initial and final subscriptions
may be submitted by fax at (304) 480-6818, by mail, or by other
carrier. All subscriptions submitted by mail, whether initial or final,
should be sent by certified or registered mail.
(b) Initial subscriptions. (1) An initial subscription, either on a
designated Treasury form or in letter form, stating the principal
amount to be invested and the issue date, must be received by Public
Debt at least five days before the issue date for subscriptions of $10
million or less, and at least seven days before the issue date for
subscriptions of over $10 million, but in no event will subscriptions
be received more than 60 days prior to issue date. Subscriptions may be
sent by facsimile transfer (fax) on (304) 480-6818, carrier service,
U.S. Postal Service or other means. If the subscription is faxed, the
original document must be received by Public Debt no later than the
issue date. Initial subscriptions of $10 million or less may be
canceled without penalty by the subscriber prior to the close of
business on the fifth day before issue date. If the fifth day before
issue date falls on a non-business day, the cancellation must occur on
the preceding business day. Subscriptions of more than $10 million may
be canceled without penalty by the subscriber prior to the close of
business of the seventh day before issue date. For example, if
securities totaling $10 million or less are to be issued on March 16,
the initial subscription must be received by Public Debt no later than
March 11. If securities totaling more than $10 million are to be issued
on March 16, the initial subscription must be received by Public Debt
no later than March 9. If the initial subscription is in letter form,
it must contain the Tax Identification Number of the government body or
it will not be accepted. It should read substantially as follows:
To: Bureau of the Public Debt
----------------------------------------------------------------------
Pursuant to the provisions of Department of the Treasury
Circular, Public Debt Series No. 3-72, current revision, the
undersigned hereby subscribes for United States Treasury Time
Deposit Securities--State and Local Government Series, to be issued
as entries on the books of the Bureau of the Public Debt, Department
of the Treasury, in the total amount and with the issue date shown
below, which date is at least five/seven days after the date of this
subscription:
Principal Amount $-----------------------------------------------------
Issue Date-------------------------------------------------------------
[[Page 39235]]
The undersigned agrees the final subscription and payment will
be submitted on or before the issue date.
----------------------------------------------------------------------
(Tax I.D. Number of state or local government body eligible to
purchase State and Local Government Series securities)
----------------------------------------------------------------------
(Name of state or local government body eligible to purchase State
and Local Government Series securities)
----------------------------------------------------------------------
(Date)
by---------------------------------------------------------------------
(Signature and Title)
(2) The provisions set out in paragraph (e) of Sec. 344.1, dealing
with the authority of the subscriber to act on behalf of a government
body, and in Sec. 344.1(h), relating to the failure to complete a
subscription, apply to initial, as well as final, subscriptions.
(3) An initial subscription may be amended on or before the issue
date, but no later than 3:00 p.m., Eastern time, on the issue date.
Notification may be faxed to the Bureau of the Public Debt at (304)
480-6818 provided the request is clearly identified as an amendment and
is immediately followed by the submission, by mail or other carrier, of
written notification. Amendments to initial subscriptions are
acceptable with the following exceptions:
(i) The issue date may not be changed to require issuance earlier
than the issue date originally specified or to require issuance more
than seven days later than originally specified. If such change is
made, notification should be provided to the Bureau of the Public Debt
as soon as possible, but no later than 3:00 p.m., Eastern time, one
business day before the originally specified issue date;
(ii) The aggregate amount may not be changed by more than the ten
percent limitation set out in paragraph (c) of this section;
(iii) An interest rate may not be changed to a rate that exceeds
the maximum interest rate in the table that was in effect for a
security of comparable maturity on the date the initial subscription
was submitted; and
(iv) Where an amendment is not submitted timely, the Division of
Special Investments may determine, pursuant to the provisions governing
waiver of regulations set forth under 31 CFR 306.126, that such an
amendment is acceptable on an exception basis. Where an amendment is
determined to be acceptable on an exception basis, the amended
information shall be used as the basis for issuing the securities, and
an administrative fee of $100 per subscription will be assessed. This
administrative fee is due on demand as provided for in Sec. 344.1(h).
The Secretary reserves the right to reject amendments which are not
submitted timely.
(4) No initial subscription will be required where a final
subscription is received at least five days before the issue date for
subscriptions of $10 million or less and at least seven days before the
issue date for subscriptions over $10 million. Such final subscription
will be treated as the initial subscription for purposes of determining
the applicable interest rate table (see Sec. 344.2(b)), and may be
amended on or before the issue date, subject to the exceptions in
paragraph (b)(3) of this section.
(c) Final subscriptions. A final subscription must be received by
the Bureau of the Public Debt on or before the issue date, but no later
than 3:00 p.m., Eastern time, on the issue date. The final subscription
may be faxed to the Bureau of the Public Debt at (304) 480-6818,
provided the fax is properly identified as a final subscription and is
immediately followed by the submission of the original subscription
form by mail or other carrier. The final subscription must be for a
total principal amount that is no more than ten percent above or below
the aggregate principal amount specified in the initial subscription.
The final subscription, dated and signed by an official authorized to
make the purchase and showing the taxpayer identification number of the
government body, must be accompanied by a copy of the initial
subscription, where applicable. The various maturities, interest rates,
and interest payment dates (in the case of notes and bonds), must be
specified in the final subscription, as well as the title(s) of the
designated official(s) authorized to request early redemption. Final
subscriptions submitted for certificates, notes and bonds must
separately itemize securities of each maturity and each interest rate.
The final subscription must contain a statement by the subscriber that
none of the proceeds submitted in payment is derived (directly or
indirectly) from the redemption before maturity of other securities of
the State and Local Government Series purchased on or before December
27, 1976.
Sec. 344.4 Issue date and payment.
The subscriber shall fix the issue date of each security in the
initial subscription. The issue date must be a business day and may not
exceed by more than sixty days the date the initial subscription was
received by Public Debt. Full payment for each subscription must be
submitted by the Fedwire funds transfer system with credit directed to
the Treasury's General Account. Full payment should be submitted by
3:00 p.m., Eastern time, to ensure that settlement on the securities
occurs on the date of issue.
Sec. 344.5 Redemption.
(a) Redemption before maturity--(1) In general. A security may be
redeemed at the owner's option no earlier than twenty-five days after
the issue date in the case of a certificate of thirty days or more, no
earlier than fifteen days before the scheduled maturity for zero
interest certificates of fifteen to twenty-nine days duration, and no
earlier than thirty days after the issue date in the case of a note or
bond. Partial redemptions may be requested in any amount; however, an
account balance of less than $1,000 will be redeemed in total.
(2) Notice. Notice of redemption prior to maturity must be
submitted, either on a designated Treasury form or by letter, by the
official(s) authorized to redeem the securities, as shown on the final
subscription form, to the Division of Special Investments, Bureau of
the Public Debt, 200 Third Street, P.O. Box 396, Parkersburg, WV 26102-
0396. The notice may be submitted by fax to the Bureau of the Public
Debt at (304) 480-6818, by mail or by other carrier. The notice must be
received by Public Debt no less than ten days before the requested
redemption date, but no more than sixty days before the requested
redemption date. The notice must show the account number, the
maturities of the securities to be redeemed, and the Tax Identification
Number of the government body. A notice of redemption prior to maturity
may not be canceled.
(3) Redemption proceeds--Subscriptions on or after [date of
publication of final rule]. For securities subscribed for on or after
[date of publication of final rule], the amount of the redemption
proceeds is calculated as follows:
(i) Interest. If a security is redeemed before maturity on a date
other than a scheduled interest payment date, interest will be paid for
the fractional interest period since the last interest payment date.
(ii) Redemption value. The remaining interest and principal
payments are discounted by the current Treasury borrowing rate for the
remaining term to maturity of the security being redeemed. This does
not apply to SLGS securities purchased before [date of publication of
final rule]. The term ``current Treasury borrowing rate'' is determined
in accordance with Sec. 344.2(b). The formulas for calculating the
redemption value under this section are set forth in
[[Page 39236]]
Appendix B of this part. Redemption proceeds in the case of a zero-
interest security are a return of the principal invested.
(4) Redemption proceeds--Subscriptions from September 1, 1989,
through [date one day prior to publication date of final rule]. For
securities subscribed for from September 1, 1989, through [date one day
prior to publication date of final rule], the amount of the redemption
proceeds is calculated as follows:
(i) Interest. If a security is redeemed before maturity on a date
other than a scheduled interest payment date, interest will be paid for
the fractional interest period since the last interest payment date.
(ii) Market charge. An amount shall be deducted from the redemption
proceeds in all cases where the current borrowing rate of the
Department of the Treasury for the remaining period to original
maturity of the security prematurely redeemed exceeds the rate of
interest originally fixed for such security. The amount shall be the
present value of the future increased borrowing cost to the Treasury.
The annual increased borrowing cost for each interest period is
determined by multiplying the principal by the difference between the
two rates. For notes and bonds, the increased borrowing cost for each
remaining interest period to original maturity is determined by
dividing the annual cost by two. For certificates, the increased
borrowing cost for the remaining period to original maturity is
determined by multiplying the annual cost by the number of days
remaining until original maturity divided by the number of days in the
calendar year. Present value shall be determined by using the current
Treasury borrowing rate as the discount factor. The term ``current
Treasury borrowing rate'' means the applicable rate shown in the table
of maximum interest rates payable on United States Treasury
securities--State and Local Government Series--for the day the request
for early redemption is received by Public Debt, plus \1/8\ of 1
percentage point. Where redemption is requested as of a date less than
thirty days before the original maturity date, such applicable rate is
the rate shown for a security with a maturity of thirty days. The
market charge for bonds, notes, and certificates of indebtedness can be
computed by use of the formulas in Appendix A to this part.
(5) Redemption proceeds--Subscriptions from December 28, 1976,
through August 31, 1989. For securities subscribed for from December
28, 1976, through August 31, 1989, the amount of the redemption
proceeds is calculated as follows:
(i) Interest. Interest for the entire period the security was
outstanding shall be recalculated on the basis of the lesser of the
original interest rate at which the security was issued, or the
interest rate that would have been set at the time of the initial
subscription had the term for the security been for the shorter period.
If a note or bond is redeemed before maturity on a date other than a
scheduled interest payment date, no interest will be paid for the
fractional interest period since the last interest payment date.
(ii) Overpayment of interest. If there have been overpayments of
interest, as determined under paragraph (b)(5)(i) of this section,
there shall be deducted from the redemption proceeds the aggregate
amount of such overpayments, plus interest, compounded semi-annually,
thereon from the date of each overpayment to the date of redemption.
The interest rate to be used in calculating the interest on the
overpayment shall be one-eighth of one percent above the maximum rate
that would have applied to the initial subscription had the term of the
security been for the shorter period.
(iii) Market charge. An amount shall be deducted from the
redemption proceeds in all cases where the current borrowing rate of
the Department of the Treasury for the remaining period to original
maturity of the security prematurely redeemed exceeds the rate of
interest originally fixed for such security. The amount shall be
calculated using the formula in paragraph (b)(4)(ii) of this section.
(6) Redemption proceeds--Subscriptions on or before December 27,
1976. (i) For securities subscribed for on or before December 27, 1976,
the amount of the redemption proceeds is calculated as follows.
(ii) The interest for the entire period the security was
outstanding shall be recalculated on the basis of the lesser of the
original interest rate at which the security was issued, or an adjusted
interest rate reflecting both the shorter period during which the
security was actually outstanding and a penalty. The adjusted interest
rate is the Treasury rate which would have been in effect on the date
of issuance for a marketable Treasury certificate, note, or bond
maturing on the quarterly maturity date prior to redemption (in the
case of certificates), or on the semi-annual maturity period prior to
redemption (in the case of notes and bonds), reduced in either case by
a penalty which shall be the lesser of:
(A) One-eighth of one percent times the number of months from the
date of issuance to original maturity, divided by the number of full
months elapsed from the date of issue to redemption; or
(B) One-fourth of one percent.
(iii) There shall be deducted from the redemption proceeds, if
necessary, any overpayment of interest resulting from previous payments
made at a higher rate based on the original longer period to maturity.
(b) [Reserved]
Subpart C--Demand Deposit Securities
Sec. 344.6 Description of securities.
(a) Terms. The securities are defined as one-day certificates of
indebtedness. Each subscription will be established as a unique
account. Securities will be automatically rolled over each day unless
redemption is requested.
(b) Interest rate. (1) Each security shall bear a variable rate of
interest based on an adjustment of the average yield for three-month
Treasury bills at the most recent auction. A new rate will be effective
on the first business day following the regular auction of three-month
Treasury bills and will be shown in a SLGS securities rate table,
available to the public on such business day. Interest will be accrued
and added to principal daily. Interest will be computed on the balance
of the principal, plus interest accrued through the immediately
preceding day.
(2)(i) The annualized effective demand deposit rate in decimals,
designated ``I'' in Equation 1 is calculated as:
[GRAPHIC] [TIFF OMITTED] TP26JY96.002
where:
P=Average auction price for the most recently auctioned 13-week
Treasury bill, per hundred, to three decimals.
Y=365 if the year following issue date does not contain a leap year day
and 366 if it does contain a leap year day.
DTM=The number of days from date of issue to maturity for the most
recently auctioned 13-week Treasury bill.
MTR=Estimated marginal tax rate, in decimals, of purchasers of short-
term tax-exempt bonds.
TAC=Treasury administrative costs, in decimals.
[[Page 39237]]
(ii) The daily factor for the demand deposit rate is then
calculated as follows:
[GRAPHIC] [TIFF OMITTED] TP26JY96.003
(3) Information as to the estimated average marginal tax rate and
costs for administering the demand deposit State and Local Government
Series securities program, both to be determined by Treasury from time
to time, will be published in the Federal Register.
(c) Payment. Interest earned on the securities will be added to the
principal and will be reinvested daily until redemption. At any time
the Secretary determines that issuance of obligations sufficient to
conduct the orderly financing operations of the United States cannot be
made without exceeding the statutory debt limit, the Department will
invest any unredeemed demand deposit securities in special ninety-day
certificates of indebtedness. These ninety-day certificates will be
payable at maturity, but redeemable before maturity, provided funds are
available for redemption, or reinvested in demand deposit securities
when regular Treasury borrowing operations resume, both at the owner's
option. Funds invested in the ninety-day certificates of indebtedness
will earn simple interest equal to the daily factor in effect at the
time demand deposit security issuance is suspended, multiplied by the
number of days outstanding.
Sec. 344.7 Subscription for purchase.
(a) Subscription requirements. Subscriptions for purchase of
securities under this offering must be submitted to the Division of
Special Investments, Bureau of the Public Debt, 200 Third Street, P.O.
Box 396, Parkersburg, WV 26102-0396. Subscriptions must be submitted on
a designated Treasury form, must specify the principal amount to be
invested and the issue date, and must be signed by an official
authorized to make the purchase. The Bureau of the Public Debt must
receive the subscription at least five business days before the issue
date for subscriptions of $10 million or less and at least seven
business days before the issue date for subscriptions of more than $10
million. Subscriptions for more than $10 million can be canceled
without penalty up to seven days prior to the issue date. Subscriptions
for $10 million or less may be canceled without penalty up to five days
prior to the issue date. The subscription may be submitted by fax at
(304) 480-6818, by certified or registered mail, or by other carrier.
If faxed, the original subscription form must be received by the
Division of Special Investments by 3:00 p.m., Eastern time, on the
issue date. Public Debt will not accept subscriptions for demand
deposit securities more than 60 days prior to the issue date.
(b) Amending subscriptions. The principal amount to be invested may
be changed without penalty on or before the issue date, but no later
than 1:00 p.m. Eastern time, on the issue date. The request must be
clearly identified as an amendment and must be followed immediately by
the submission, by mail or other carrier, of written notification.
Where an amendment is not submitted timely, the Division of Special
Investments may determine, pursuant to the provisions governing waiver
of regulations set forth under 31 CFR 306.126, that such an amendment
is acceptable on an exception basis. Where an amendment is determined
to be acceptable on an exception basis, the amended information shall
be used as the basis for issuing the securities, and an administrative
fee of $100 per subscription will be assessed. This administrative fee
is due on demand as provided for in Sec. 344.1(h). The Secretary
reserves the right to reject amendments which are not submitted timely.
Sec. 344.8 Issue date and payment.
The subscriber shall fix the issue date on the subscription, the
issue date to be a business day at least five business days after
receipt of the subscription by the Division of Special Investments for
subscriptions of $10 million or less and seven business days after
receipt of the subscription by the Division of Special Investments for
subscriptions more than $10 million. Full payment for each subscription
must be submitted by the Fedwire funds transfer system with credit
directed to the Treasury's General Account. Full payment should be
received by the Division of Special Investments by 3:00 p.m., Eastern
time, to ensure that settlement on the securities occurs on the issue
date.
Sec. 344.9 Redemption.
(a) General. A security may be redeemed at the owner's option,
provided a request for redemption is received not less than one
business day prior to the requested redemption date for redemptions of
$10 million or less and received not less than three business days for
redemptions of more than $10 million. Partial redemptions may be
requested in any amount; however, an account balance of less than
$1,000 will be redeemed in total. Payment will be made by Fedwire.
(b) Notice. Notice of redemption must be submitted, either on a
designated Treasury form or by letter, by the official(s) authorized to
redeem the securities, as shown on the subscription form, to the
Division of Special Investments, Bureau of the Public Debt, 200 Third
Street, P.O. Box 396, Parkersburg, WV 26102-0396. The notice may be
submitted by fax to the Bureau of the Public Debt at (304) 480-6818, by
mail, or by other carrier. The notice must show the account number and
the Tax Identification Number of the government body. The notice of
redemption must be received at the Bureau of the Public Debt by 1:00
p.m., Eastern time on the required day.
Subpart D--Special Zero Interest Securities
Sec. 344.10 General.
Provisions of subpart B of this part (Time Deposit Securities)
apply except as specified in subpart D of this part. Special zero
interest securities will no longer be issued after [date of publication
of final rule]. All zero interest securities issued after [date of
publication of final rule] are zero interest time deposit securities,
subject to the rules of subpart B of this part.
Sec. 344.11 Redemption.
(a) General. Provisions of Sec. 344.5(a) apply.
(b) Before maturity. (1) In general. A security may be redeemed at
the owner's option no earlier than twenty-five days after the issue
date in the case of a certificate and thirty days after the issue date
in the case of a note. No market charge or penalty shall apply in the
case of the redemption of a special zero interest security before
maturity.
(2) Notice. Notice of redemption prior to maturity must be
submitted, either on a designated Treasury form or by letter, by the
official(s) authorized to redeem the securities, as shown on the final
subscription form, to the Division of Special Investments, Bureau of
the Public Debt, 200 Third Street, P.O. Box 396, Parkersburg, WV 26102-
0396. The notice may be submitted by fax to the Bureau of the Public
Debt at (304) 480-6818, by mail, or by other carrier. The notice must
show the account number, the maturities of the securities to be
redeemed, and the Tax Identification Number of the government body. The
notice must be received by Public Debt no less than fifteen days before
the requested redemption date, but no more than sixty days before the
requested redemption date. A notice of redemption prior to maturity
cannot be canceled.
[[Page 39238]]
Appendix A to Part 344--Early Redemption Market Change Formulas and
Examples for subscriptions from September 1, 1989, through [date of
publication of final rule]
A. The amount of the market charge for bonds and notes issued
before (date of publication of final rule) can be determined by the
following formula:
[GRAPHIC] [TIFF OMITTED] TP26JY96.004
where:
M=Market charge
b=increased annual borrowing cost (i.e., principal multiplied by the
excess current borrowing rate for the period from redemption to
original maturity of note or bond over the rate for the security)
r=number of days from redemption date to next interest payment date
s=number of days in current semi-annual period
i=Treasury borrowing rate over the remaining term to maturity, based on
semi-annual interest payments and expressed in decimals.
n=number of remaining full semi-annual periods from the redemption date
to the original maturity date, except that if the redemption date is on
an interest payment date, n will be one less than the number of full
semi-annual periods remaining to maturity.
[GRAPHIC] [TIFF OMITTED] TP26JY96.005
B. The application of this formula may be illustrated by the
following example:
(1) Assume that a $600,000 note is issued on July 1, 1985, to
mature on July 1, 1995. Interest is payable at a rate of 8% on January
1 and July 1.
(2) Assume that the note is redeemed on February 1, 1989, and that
the current borrowing rate for Treasury at that time for the remaining
period of 6 years and 150 days is 11%.
(3) The increased annual borrowing cost is $18,000.
($600,000) x (11%-8%)
(4) The market charge is computed as follows:
[GRAPHIC] [TIFF OMITTED] TP26JY96.006
[[Page 39239]]
[GRAPHIC] [TIFF OMITTED] TP26JY96.007
C. The amount of the market charge for certificates issued before
[date of publication of final rule] can be determined through use of
the following formula:
[GRAPHIC] [TIFF OMITTED] TP26JY96.008
where:
M=market charge
b=increased borrowing cost for full period
r=number of days from redemption date to original maturity date
s=number of days in current annual period (365 or 366)
i=current borrowing rate expressed in decimals (discount factor)
D. The application of this formula may be illustrated by the
following example:
(1) Assume that a $50,000 certificate is issued on March 1, 1987,
to mature on November 1, 1987. Interest is payable at a rate of 10%.
(2) Assume that the certificate is redeemed on July 1, 1987, and
that the current borrowing cost to Treasury for the 123-day period from
July 1, 1987, to November 1, 1987, is 11.8%.
(3) The increased annual borrowing cost is $900.
($50,000) x (11.8%-10%)
(4) The market charge is computed as follows:
[[Page 39240]]
[GRAPHIC] [TIFF OMITTED] TP26JY96.009
Appendix B to Part 344--Formula for Determining Redemption Value
for Securities Purchased and Early-Redeemed After [date of publication
of final rule]
The total redemption value for bonds and notes can be determined by
the following two steps:
First, accrued interest payable in accordance with Section
344.5(a)(3)(i) is calculated using the following formula:
[GRAPHIC] [TIFF OMITTED] TP26JY96.010
and secondly, the redemption value per Sec. 344.5(a)(3)(ii) is
calculated using the following equation:
[GRAPHIC] [TIFF OMITTED] TP26JY96.011
where:
RV=Redemption value per $100 principal
AI=Accrued interest=[(s-r)/s] x (C/2)
r=Number of days from redemption date to next interest payment date
s=number of days in current semi-annual period
i=Treasury borrowing rate over the remaining term to maturity, based on
semi-annual interest payments and expressed in decimals
C=the regular annual interest per $100 principal
n=number of remaining full semi-annual periods from the redemption date
to the original maturity date, except that, if the redemption date is
an interest payment date, n will be one less than the number of full
semi-annual periods remaining to maturity.
vn=1/(1+i/2)n=present value of 1 due at the end of n periods
an=(1 - vn)/(i/2)=v + v2 + v3 + ... +
vn=present value of 1 per period for n periods
[FR Doc. 96-19040 Filed 7-23-96; 3:03 pm]
BILLING CODE 4810-39-P
