02-28662. Sale and Issue of Marketable Book-Entry Treasury Bills, Notes, and Bonds; Reporting of Net Long Position and Application of the 35 Percent Limit

AGENCY:

Bureau of the Public Debt, Fiscal Service, Department of the Treasury.

ACTION:

Final rule.

SUMMARY:

The Department of the Treasury (“Treasury,” “We,” or “Us”) is issuing in final form an amendment to the regulation “Uniform Offering Circular for the Sale and Issue of Marketable Book-Entry Treasury Bills, Notes, and Bonds.” This amendment modifies the net long position (“NLP”) reporting threshold for all Treasury marketable securities auctions. The threshold, currently $1 billion for Treasury bill auctions and $2 billion for Treasury note auctions, is being changed to 35 percent of the offering amount in each auction. This modification will reduce the number of auction bidders that are required to report their NLPs, while ensuring that we can still effectively administer the 35 percent award limit.

The amendment also incorporates certain changes in Treasury's marketable securities auction program that have already been implemented. First, the amendment modifies the competitive bid format for auctions of Treasury cash management bills to conform to a policy change that was made in April 2002. The current two-decimal bid format is being changed to three decimals in .005 percent increments, which is the format in all other Treasury bill auctions.

Second, the amendment makes several changes to reflect the current treatment in all Treasury marketable securities auctions of bids from Federal Reserve Banks for their own accounts and for the accounts of foreign and international monetary authorities. Specifically, the amendment deletes the defined term “public offering,” adds “offering amount” as a new defined term, revises the definition of “bid-to-cover ratio,” and makes conforming changes within the text of the Uniform Offering Circular. These changes make the terminology consistent between the Uniform Offering Circular and auction offering announcements.

EFFECTIVE DATE:

December 12, 2002.

ADDRESSES:

You may download this final rule from the Bureau of the Public Debt's Web site at www.publicdebt.treas.gov. It is also available for public inspection and copying at the Treasury Department Library, Room 1428, Main Treasury Building, 1500 Pennsylvania Avenue, NW., Washington, DC 20220. To visit the library, call [phone] for an appointment.

FOR FURTHER INFORMATION CONTACT:

Lori Santamorena (Executive Director), Chuck Andreatta (Senior Financial Advisor), or Lee Grandy (Associate Director), Bureau of the Public Debt, Government Securities Regulations Staff, [phone].

SUPPLEMENTARY INFORMATION:

The Uniform Offering Circular, in conjunction with the offering announcement for each auction, provides the terms and conditions for the sale and issuance to the public of marketable Treasury bills, notes, and bonds.^[1] In this document, we provide some background on the NLP and its reporting requirements. Next we discuss the public comments we received in response to an Advance Notice of Proposed Rulemaking (“ANPR”) regarding NLP reporting, published on April 29, 2002.^[2] We then describe the final amendment.

I. Background on Net Long Position Reporting

One of the requirements of the Treasury auction process is the reporting of NLPs, which we use to limit the amount that we will award to any one bidder in an auction (“the 35 percent rule”). This rule ensures that awards in our auctions are distributed to a number of auction participants. This goal of broad distribution is intended to encourage participation by a significant number of competitive bidders in each auction. Broad participation keeps our borrowing costs to a minimum, helps ensure that Treasury auctions are fair and competitive, and makes it less likely that ownership of Treasury securities will become overly concentrated.

A bidder in an auction must report its NLP if, in the security being auctioned, the bidder's NLP plus its bids in the auction meet or exceed a certain dollar-amount threshold as stated in the security's offering announcement. The NLP reporting threshold currently is $1 billion for Treasury bills and $2 billion for Treasury notes. In addition, if the sum of a bidder's bids equals or exceeds the NLP reporting threshold, but the bidder has no position or has a net short position, it must report an NLP of zero. A bidder must determine its NLP as of one-half hour prior to the deadline for receipt of competitive bids. If a bidder meets or exceeds the reporting threshold as of the NLP determination time in the auction offering announcement, the bidder must report its NLP prior to the competitive bidding deadline.

The NLP is generally the amount of the security being auctioned that a bidder has obtained, or has arranged to obtain, outside of the auction in the secondary market. The components of the NLP are intended to capture the various ways that a bidder can acquire a Treasury security.^[3] The term “net long” refers to the extent to which an investor has bought (or has agreed to buy) more of a security than it has sold (or has agreed to sell). For example, if an investor has bought $900 million of a security in the when-issued market, and it has sold $300 million of the same security in the when-issued market, it has a net long position of $600 million in that security, assuming it has no other positions.

We published an ANPR for public comment on April 29, 2002,^[4] to solicit comments on four alternatives for addressing the half-hour time lag between the time as of which the NLP is calculated (the “NLP as-of time”) and the competitive bidding deadline. It was pointed out in the ANPR that, because a bidder's NLP can change significantly during this time period, the reported NLP may not provide an accurate, or even approximate, measure of a bidder's position at the time that a bidder actually submits its bids. As a result, a bidder's award may be cut back to the 35 percent award limit based on NLP information that no longer reflects the bidder's actual NLP. Conversely, a bidder's award may not be cut back if it builds a large position in the security being auctioned between the NLP as-of time and the competitive bidding deadline. We also stated in the ANPR that we were more fundamentally reconsidering the rule. In addition, we invited comments on potential changes to the NLP reporting threshold amount, and indicated that we were considering changes in this area regardless of whether or not we implement any modifications to the NLP as-of reporting timeframes.

The four alternatives were as follows:

Alternative 1: Reduce the half-hour interval between the NLP as-of time and the competitive bidding deadline.

Alternative 2: Make the NLP as-of time the same as the competitive bidding deadline, with the NLP reporting time to follow (for example, one-half hour later). Bidders would be responsible for ensuring that their bids plus their positions, if they are net long, do not exceed the 35 percent award limit.

Alternative 3: Eliminate the NLP reporting requirement, and either maintain or reduce the 35 percent limit. Treasury would rely on its Large Position Reporting rules ^[5] and other mechanisms to monitor the market and address concentrations of ownership.

Alternative 4: Retain both the 35 percent limit and the NLP as-of and reporting timeframes as they exist now.

Potential change to NLP reporting threshold amount. Regarding this potential change, we stated in the ANPR that we are considering changing the NLP reporting threshold from $1 billion for Treasury bills and $2 billion for Treasury notes to the actual 35 percent award limit for each auction. This rule change would apply to all marketable Treasury securities auctions. We also stated that we would provide the 35 percent award limit on the auction offering announcement in each auction. Bidders whose bids plus NLPs equal or exceed the limit would be required to report their positions. For example, if the 35 percent award limit for a particular auction is $3 billion, and the total of a bidder's bids is $2.5 billion and its NLP is $1 billion, the bidder would have to report its $1 billion NLP. Bidders whose bids plus NLPs do not equal or exceed the limit would not be required to report any positions. Bidders whose total bids equal or exceed the limit but either have no position or a net short position would not have to report a zero as their NLP.

II. Comments Received in Response to the Advance Notice of Proposed Rulemaking

We received one comment in response to the ANPR, which was from The Bond Market Association (TBMA).^[6] The commenter recommended that we make three changes to the NLP rules.

First, TBMA supported Alternative 1 by advocating reducing the half-hour interval between the NLP as-of time and the competitive bidding deadline. Specifically, the commenter suggested requiring bidders to calculate their NLPs as of 12:40 p.m. rather than 12:30 p.m. TBMA stated that this modification would take advantage of technological advances by dealers while still ensuring the accuracy of submitted bids and NLPs. The commenter pointed out a disadvantage of this alternative, which is, “Because auction support staff will have less time to work with, there is certainly the possibility that Treasury may initially see a small spike in the number of NLP submission errors.” The commenter opposed providing bidders with less than 20 minutes to determine, verify and report their NLPs, primarily because “moving the time up further would put substantial strain on existing personnel,” particularly for those securities dealers with numerous domestic and foreign affiliates.

Second, TBMA strongly supported modifying the NLP reporting thresholds for bill and note auctions to 35 percent of the issuance amount, because it would “better capture only those bidders that are most likely to exceed the 35 percent limit.” The commenter maintained that the current reporting thresholds are “unnecessarily low” and that, “Any benefit Treasury derives from maintaining a low reporting threshold is outweighed by the additional bidder submission errors that result.”

Third, TBMA recommended that we discontinue requiring bidders to report a zero NLP when their bids equal or exceed the applicable reporting threshold but they have either no net long position or a net short position. The commenter advocated that such bidders be given the choice of either reporting a zero NLP or leaving the field blank. TBMA acknowledged that, “requiring bidders to report their negative NLP as zero does theoretically act as a check that a bidder realized that it was over the threshold.” However, TBMA asserted that inadvertent failures by bidders to report a zero have resulted in “serious violation letters” from Treasury, where in fact such instances are “a technical violation of the auction rules that in no way could have impacted the results of the auction.”

In addition to the modifications it favored, TBMA also advised against adopting either Alternative 2 or 3. In particular, TBMA argued against post-auction reporting of NLPs (Alternative 2), primarily because it would discourage aggressive bidding since “large bidders would have to allow themselves a substantial ‘margin for error’ with respect to the 35 percent rule.”

III. Amendment to the Rule

Net Long Position Reporting Threshold

After considering the comment letter we received, we are modifying the NLP reporting threshold to 35 percent of the offering amount in each auction. We agree with the commenter that this change will more precisely apply only to those bidders whose bids are most likely to equal or exceed the 35 percent award limit in an auction. Accordingly, § 356.13(a) is revised to reflect that the net long position reporting threshold amount will be 35 percent of the offering amount. The NLP reporting threshold will be provided on the offering announcement for each auction.

We are not considering any other changes to the NLP reporting requirement at this time. The NLP as-of reporting time will continue to be one half-hour prior to the deadline for receiving competitive bids. We agree with TBMA that shortening this time interval could result in an increase in NLP reporting errors. Since shortening the time interval to 20 minutes would still leave a significant time period in which bidders' positions in the securities being auctioned could change significantly prior to the deadline for receiving competitive bids, we believe that the disadvantages of a likely increase in NLP reporting errors outweigh the benefits of a shorter time period for calculating and reporting NLPs.

We also have decided to maintain the requirement for bidders to report an NLP of zero when their bids equal or exceed the applicable reporting threshold but they have either no net long position or a net short position. We believe that this requirement acts as an important check to ensure that bidders with very large bids in an auction calculated their NLPs for possible reporting in the auction.

Conforming Technical Changes

We are also making a conforming technical change to § 356.12(c)(1)(i) of the auction rules to reflect that competitive bids in all cash management bill auctions must now be expressed as a discount rate with three decimals in increments of .005 percent, for example, 3.100%, 3.105%.^[7] This change will make the competitive bid format for cash management bills the same as for all other types of Treasury bills. This change will enable competitive bidders to better fine-tune their bids in cash management bill auctions.

We are deleting from § 356.12 the defined term “public offering” and adding the defined term “offering amount.” In the past, “public offering” had a different meaning from “offering amount” as used on the offering announcement because of the treatment of amounts bid by the Federal Reserve's System Open Market Account (SOMA) and by foreign and international monetary authorities (FIMA). In March 1997, Treasury announced that awards to SOMA in Treasury bill auctions would be treated as additions to the announced offering amount, the same treatment as for note and bond auctions.^[8] Since February 2001, when specific noncompetitive bidding and award limitations were placed on FIMA accounts,^[9] awards to FIMA accounts are made within the offering amount, as are those to the public in general. Since these changes, the treatment of FIMA and SOMA is consistent for all Treasury securities auctions. Awards to SOMA are made in addition to the offering amount; FIMA awards are within the offering amount.

The definition of “public offering” in § 356.2 is no longer accurate to the extent that the definition continues to exclude FIMA bids up to the amount of maturing securities in those accounts. Since there is no longer any difference in the meaning of “public offering” and “offering amount,” and the offering announcements use the term “offering amount,” we are deleting the term “public offering” and adding the term “offering amount” to the Uniform Offering Circular, and making conforming changes within the text. One of these conforming changes is to the definition of “bid-to-cover ratio,” which previously excluded both SOMA and FIMA bids and awards, and now only excludes SOMA bids and awards.

Finally, this amendment incorporates technical changes in §§ 356.20 and 356.21 to conform to our policy for prorating competitive bids at the highest accepted yield or discount rate. In the weekly bill auctions of April 30, 2001, we changed the rounding convention for the allocation percentage from rounding up to the next whole percentage point to rounding up to the next hundredth of a whole percentage point.

IV. Procedural Requirements

This final rule is not a significant regulatory action for purposes of Executive Order 12866. Although we issued an Advance Notice of Proposed Rulemaking on April 29, 2002, to benefit from public comment, the notice and public procedures requirements of the Administrative Procedure Act do not apply, under 5 U.S.C. 553(a)(2).

Since no notice of proposed rulemaking is required, the provisions of the Regulatory Flexibility Act (5 U.S.C. 601 et seq.) do not apply.

The collections of information in this final rule amendment have been previously approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act of 1995. This final rule is technical in nature and imposes no additional burdens on auction bidders.

List of Subjects in 31 CFR Part 356

• Bonds
• Federal Reserve System
• Government securities
• Securities

For the reasons stated in the preamble, 31 CFR 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 removing the definition of “Public offering,” revising the definition of “Bid-to-cover ratio,” and adding the defined term “Offering amount” between the defined terms “Noncompetitive bid” and “Par” to read as follows:

§ 356.2

Definitions.

* * * * *

Bid-to-cover ratio means the total par amount of securities bid for by the public divided by the total par amount of securities awarded to the public. The bid-to-cover ratio excludes any bids or awards for the account of the Federal Reserve Banks.

* * * * *

Offering amount means the par amount of securities offered to the public for purchase in an auction, as specified in the offering announcement.

* * * * *

3. Section 356.12 is amended by revising paragraphs (c)(1)(i) and (c)(2) to read as follows:

§ 356.12

Noncompetitive and competitive bidding.

* * * * *

(c) Competitive. * * *

(1) Bid format—(i) Treasury bills. A competitive bid must show the discount rate bid, expressed with three decimals in .005 percent increments. The third decimal must be either a zero or a five, e.g., 5.320 or 5.325. Fractions may not be used.

* * * * *

(2) Maximum recognized bid. There is no limitation on the maximum dollar amount that a bidder may bid for competitively, either at one yield or discount rate, or at different yields or discount rates. However, a competitive bid at a single yield or discount rate that exceeds 35 percent of the offering amount will be reduced to that amount. For example, if the offering amount is $10 billion, the maximum bid amount that will be recognized at any one yield or discount rate from any bidder is $3.5 billion. (See § 356.22 for award limitations.)

4. Section 356.13 is amended by revising paragraph (a) to read as follows:

§ 356.13

Net long position.

(a) Reporting net long positions. When bidding competitively, a bidder must report the amount of its net long position when the total of all of its bids in an auction plus the bidder's net long position in the security being auctioned equals or exceeds the net long position reporting threshold amount. The net long position reporting threshold amount for any particular security will be stated in the offering announcement for that security. (See § 356.10.) That amount will be 35 percent of the offering amount, unless otherwise stated in the offering announcement. If the bidder either has no position or has a net short position and the total of all of its bids equals or exceeds the net long position reporting threshold amount, a net long position of zero must be reported. In cases where a bidder that is required to report the amount of its net long position has more than one bid, the bidder's total net long position should be reported in connection with only one bid. A bidder that is a customer must report its reportable net long position through only one depository institution or dealer. (See § 356.14(c).)

* * * * *

5. Section 356.20 is amended by revising paragraph (a) to read as follows:

§ 356.20

Determination of auction awards.

(a) Determining the range and amount of accepted competitive bids— (1) Accepting bids. Determinations of awards in auctions are made after the closing time for receipt of bids. In determining auction awards, all noncompetitive bids received by the closing time specified in the offering announcement are accepted in full. Then competitive bids are accepted, starting with those at the lowest yields or discount rates through successively higher yields or discount rates, up to the amount required to meet the offering amount. Bids at the highest accepted yield or discount rate will be prorated (as described in paragraph (a)(2) of this section), if necessary. If the amount of noncompetitive bids would absorb most or all of the offering amount, competitive bids will be accepted in an amount determined by Treasury to be sufficient to provide a fair determination of the yield or discount rate for the securities being auctioned.

(2) Accepting bids at the high yield or discount rate. When the total amount of bids at the highest accepted yield or discount rate exceeds the amount of the offering amount remaining after acceptance of noncompetitive bids and competitive bids at the lower yields or discount rates, a percentage of the bids received at the highest accepted yield or discount rate will be awarded. This proration is performed for the purpose of awarding a par amount of securities close to the offering amount. The percentage is derived by dividing the remaining par amount needed to fill the offering amount by the par amount of the bids recognized at the high yield or rate and rounding up to the next hundredth of a whole percentage point, for example, 17.13%.

* * * * *

6. Section 356.21 is amended by revising paragraph (a) and the second sentence of paragraph (b) to read as follows:

§ 356.21

Proration of awards.

(a) Awards to submitters. In auctions where bids at the highest accepted yield or discount rate are prorated under § 356.20(a)(2) of this part, the Federal Reserve Banks are responsible for prorating awards for submitters at the percentage announced by the Department. For example, if 80.15% is the announced percentage at the highest yield or discount rate, then each bid at that rate or yield shall be awarded 80.15% of the amount bid. Hence, a bid for $100,000,000 at the highest accepted yield or discount rate would be awarded $80,150,000. In all cases, awards will be for at least the minimum to hold, and awards must be in an appropriate multiple to hold. Awards at the highest accepted yield or rate are adjusted upwards, if necessary, to an appropriate multiple to hold. For example, Treasury bills may be issued with a minimum to hold of $1,000 and multiples of $1,000. Where an $18,000 bid is accepted at the high discount rate, and the percent awarded at the high discount rate is 88.27%, the award to that bidder will be $16,000, representing an upward adjustment from $15,888.60 ($18,000 × .8827) to an appropriate multiple to hold. If tenders at the highest accepted discount rate are prorated at, for example, a rate of 4.65%, the award for a $10,000 bid will be $1,000, instead of $465, in order to meet the minimum to hold for a bill issue.

(b) Awards to customers.* * * For example, if 80.15% is the announced percentage at the highest yield or discount rate, then each customer bid at that rate or yield shall be awarded 80.15%.* * *

7. Section 356.22 is amended by revising paragraph (b) to read as follows:

§ 356.22

Limitation on auction awards.

* * * * *

(b) Awards to competitive bidders. The maximum award that will be made to any bidder is 35 percent of the offering amount less the bidder's net long position as reportable under § 356.13. For example, in a note auction with a $10 billion offering amount, a bidder with a reported net long position of $1 billion could receive a maximum auction award of $2.5 billion. When the bids and net long positions of more than one person or entity must be combined as required by § 356.15(c), such combined amount will be used for the purpose of this award limitation.

Dated: November 5, 2002.

Donald V. Hammond,

Fiscal Assistant Secretary.

Footnotes

1.  The Uniform Offering Circular was published as a final rule on January 5, 1993 (58 FR 412). The Uniform Offering Circular, as amended, is codified at 31 CFR Part 356.

2.  67 FR 20934 (April 29, 2002).

3.  See 31 CFR 356.13(b) for details on the components of the NLP. See also the amendment to the Uniform Offering Circular published on November 13, 2001 (66 FR 56759), which provided an optional exclusion amount in the NLP calculation for reopenings.

4.  See supra, note 2.

5.  17 CFR 420.

6.  The ANPR and comment letter, dated June 27, 2002, are available for downloading on the Internet, and for inspection and copying at the Treasury Department Library at the addresses provided earlier in this final rule.

7.  Treasury announced this policy change in a Press Release dated April 2, 2002, that announced several offerings of cash management bills. Subsequent cash management bill offering announcements also stated this bidding requirement. The offering announcement governs in cases where it is inconsistent with the Uniform Offering Circular. (See § 356.10)

8.  Treasury Press Release dated March 18, 1997.

9.  The policy change was announced in a Treasury Press Release dated November 14, 2000, and became effective on February 1, 2001.