[Federal Register Volume 60, Number 242 (Monday, December 18, 1995)]
[Proposed Rules]
[Pages 65214-65229]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-30766]
[[Page 65213]]
_______________________________________________________________________
Part VI
Department of the Treasury
_______________________________________________________________________
Office of the Under Secretary for Domestic Finance
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17 CFR Parts 400 and 420
Government Securities Act Regulations: Large Position Rules; Proposed
Rule
Federal Register / Vol. 60, No. 242 / Monday, December 18, 1995 /
Proposed Rules
[[Page 65214]]
DEPARTMENT OF THE TREASURY
Office of the Under Secretary for Domestic Finance
17 CFR Parts 400 and 420
RIN: 1505-AA53
Government Securities Act Regulations: Large Position Rules
AGENCY: Office of the Under Secretary for Domestic Finance, Treasury.
ACTION: Proposed rule.
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SUMMARY: The Department of the Treasury (``Department'' or
``Treasury'') is publishing for comment proposed rules that would
establish a new Part 420 providing recordkeeping and reporting
requirements pertaining to large positions in certain Treasury
securities. The proposed regulations are being issued pursuant to the
Government Securities Act Amendments of 1993, which authorized the
Secretary of the Treasury to prescribe rules requiring persons holding,
maintaining or controlling large positions in to-be-issued or recently-
issued Treasury securities to keep records and file reports of such
large positions.
The proposed recordkeeping rules require any person or entity that
controls a position equal to or greater than $2 billion in a Treasury
security to maintain and preserve certain records that enable the
entity to record, compile, aggregate and report large position
information. The proposed reporting rules require entities to file a
large position report with the Federal Reserve Bank of New York if
their reportable position equals or exceeds the large position
threshold in a particular Treasury security as specified by the
Treasury in a notice requesting large position information. The
Department's proposed large position rules are intended to provide the
Treasury and other securities regulators with information on
concentrations of control that would enable them to better understand
the possible reasons for apparent significant price distortions and the
causes of market shortages in certain Treasury securities.
DATES: Comments must be received on or before February 16, 1996.
ADDRESSES: Comments should be sent to: Government Securities
Regulations Staff, Bureau of the Public Debt, Department of the
Treasury, 999 E Street, N.W., Room 515, Washington, D.C. 20239-0001.
Comments received will be available for public inspection and copying
at the Treasury Department Library, Room 5030, Main Treasury Building,
1500 Pennsylvania Avenue, N.W., Washington, D.C. 20220.
FOR FURTHER INFORMATION CONTACT: Ken Papaj, Director, or Don Hammond,
Assistant Director, Government Securities Regulations Staff, at 202-
219-3632. (TDD for the hearing impaired is 202-219-3988.)
SUPPLEMENTARY INFORMATION:
I. Background
Statutory Authority
In response to certain events that occurred in the government
securities market in 1990-1991--short squeezes in the two-year Treasury
notes issued in April and May 1991 and bidding improprieties in several
auctions of Treasury securities in 1990-19911--Congress included
in the Government Securities Act Amendments of 1993 (GSAA)2 a
provision granting the Department the authority to write rules for
large position reporting in certain Treasury securities. Specifically,
Section 104 of the GSAA, which amended Section 15C of the Securities
Exchange Act of 1934,3 authorizes the Treasury to adopt rules
requiring specified persons holding, maintaining or controlling large
positions in to-be-issued or recently-issued Treasury securities to
maintain records and file reports regarding such positions.4 This
provision is intended to improve the information available to the
Treasury and other regulators regarding very large positions of
recently-issued Treasury securities held by market participants and to
ensure that regulators have the tools necessary to monitor the Treasury
securities market.
\1\For a discussion of the events that gave rise to the
establishment of large position reporting authority, see the Joint
Report on the Government Securities Market, Department of the
Treasury, Securities and Exchange Commission and Board of Governors
of the Federal Reserve System, (1992); Salomon Brothers Inc. Press
Releases dated August 9 and 14, 1991; S. Rep. No. 103-109 (July 27,
1993); H.R. Rep. No. 103-255 (September 23, 1993); and 60 FR 4576
(January 24, 1995).
\2\Pub. L. No. 103-202, 107 Stat. 2344 (1993).
\3\15 U.S.C. 78o-5.
\4\Pub. L. No. 103-202, Sec. 104; 107 Stat. 2344, 2346-2348; 15
U.S.C. 78o-5(f).
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The GSAA gave the Department wide latitude and discretion in
determining several key features and conditions that would form the
underpinnings of the large position recordkeeping and reporting rules.
Among the most significant of these features were: defining which
persons (individually or as a group) hold, maintain or control large
positions; determining the minimum size of positions to be reported;
determining what constitutes ``control'' for the purposes of the rules;
prescribing the manner in which positions and accounts are to be
aggregated; identifying the types of positions to be reported;
determining the securities that would be subject to the rules; and
developing the form, manner and timing of reporting. The proposed rules
address these points.
Participation in Rulemaking Process/Solicitation of Comments
In formulating the process to be used to develop large position
rules, the Department, early on, made a decision to obtain the views of
the market participants who would be directly affected by such
regulations. We also decided that it would be useful to explain the
Department's initial thoughts on the structure and purposes of the
rules, to explore various conceptual approaches to designing a large
position recordkeeping and reporting system and to obtain industry
comment and feedback before actually drafting proposed rules. We
believed that market participant involvement in the rulemaking
initiative from its outset would facilitate greater understanding of,
and support for, the final rules when implemented.
Accordingly, in order to involve market participants and other
interested parties at the earliest phase of the rulemaking process, the
Department issued an Advance Notice of Proposed Rulemaking (ANPR) on
January 24, 1995.\5\ The ANPR addressed several key issues, concepts
and approaches to be considered in developing large position
recordkeeping and reporting rules, and solicited comments, suggestions
and recommendations regarding how the requirements should be
structured. Rather than repeating that information here, readers are
encouraged to review the ANPR to familiarize themselves with these
issues. The ANPR also contains a detailed historical background that
provides a fuller understanding of the events and circumstances that
resulted in the establishment of this regulatory authority, the
purposes and objectives to be achieved from large position rules, and
the Congressional intent behind this legislation.
\5\60 FR 4576 (January 24, 1995).
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The 90-day comment period on the ANPR was extended, in response to
an industry request, for an additional 30 days through May 24, 1995.\6\
In response to the ANPR, the Department received seven comment letters
which are summarized in the next section of the preamble.
\6\60 FR 20065 (April 24, 1995).
[[Page 65215]]
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In addition to considering the views expressed by the commenters to
the ANPR, Department staff has also consulted with various regulatory
agencies (i.e., staff of the Securities and Exchange Commission (SEC),
the Commodities Futures Trading Commission, the Board of Governors of
the Federal Reserve System and the Federal Reserve Bank of New York
(FRBNY)) in developing this proposal. We intend to continue to involve
interested market participants and the regulatory agencies in the
development of the large position regulations through the completion of
the rulemaking process. Accordingly, the Department welcomes and
strongly encourages market participants to submit comments on the
proposed rules and any suggestions for reducing burdens on the industry
while still achieving the objectives of the rules.
Balancing of Regulatory and Market Needs
The Department has attempted to strike a balance between achieving
the purposes and objectives of the statute and minimizing costs and
burdens to those entities affected by the regulations. For the
following reasons, we believe that the rules being proposed
successfully achieve this balance.
First, the proposed rules envision reports to be submitted only in
response to a specific request by the Treasury for large position
information on a particular Treasury security issue. Under this
approach, reporting should be an infrequent event required primarily in
response to pricing anomalies in a specific Treasury security rather
than a regular, on-going process resulting from a certain pre-
determined large position threshold being exceeded in a broader range
of securities.
Second, the proposed rules establish a minimum large position
threshold of $2 billion below which the Treasury would not request
large position reports. As a result, we believe that very few entities
would be required to file large position reports.
Third, the recordkeeping requirements would generally not apply to
any reporting entity (as defined in the rules) that did not control a
position that equalled or exceeded $2 billion in a Treasury security.
Fourth, for those entities currently subject to recordkeeping rules
of the SEC, the Treasury or the bank regulatory agencies, the proposed
rules impose only minor additional recordkeeping requirements and only
if certain conditions are present. Finally, the proposed rules adopt
several concepts from the Treasury's auction rules (e.g., positions to
be included in a reportable large position, definition of a reporting
entity and method of aggregating positions) which have been in effect
since March 1993 and are understood by many of the major participants
in the Treasury securities market.\7\ This should reduce the time and
costs that affected entities will need for training their employees on
the large position rules.
\7\Uniform Offering Circular for the Sale and Issue of Treasury
Bills, Notes and Bonds, 31 CFR Chapter II, Subchapter B, Part 356.
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Scope of Large Position Rules
It is important for all market participants to recognize that large
position rules create a requirement to maintain records and report
information about such positions. However, these requirements only
apply to entities that hold or control (i.e., exercise investment
discretion) large positions, as determined by the Department, in
specific Treasury security issues. Accordingly, there is no obligation
on executing brokers and dealers to report large trades nor is there an
affirmative duty to inform their customers of the large position
recordkeeping and reporting requirements being proposed as part of this
rulemaking.
The Department reiterates that large positions are not inherently
harmful and there is no presumption of manipulative or illegal intent
on the part of the controlling entity merely because a position is
large enough to be subject to the Treasury rules. In addition, the
proposed rules do not establish trading or position limits or require
the identification of large traders or the reporting of large trades.
Finally, the GSAA specifically provides that the Department shall not
be compelled to disclose publicly any information required to be kept
or reported for large position reporting. In particular, such
information is exempt from disclosure under the Freedom of Information
Act.8
\8\5 U.S.C. 552(b)(3)(B).
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II. Comments Received in Response to ANPR
Seven comment letters were received in response to the ANPR. The
letters were submitted by two trade organizations, one primary dealer,
a Federal Reserve Bank, a bank regulatory agency, a commercial bank and
an insurance company.9 While all comments are summarized below,
each letter did not necessarily address all aspects of the ANPR.
\9\Public Securities Association, Investment Company Institute,
Chemical Securities Inc., the Federal Reserve Bank of New York, the
Board of Governors of the Federal Reserve System, Chemical Bank, and
CNA Insurance Companies, respectively.
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Six commenters were largely supportive of a large position
reporting system provided that such a reporting system would not be
overly burdensome for market participants. However, one commenter
opposed the concept of large position reporting entirely. This party
believed that ``the current auction reporting rules have already
addressed adequately the prior problems with market manipulation,'' and
that an unintended consequence of large position rules could be fewer
participants in the government securities market, which, in turn, would
result in higher borrowing costs.
On-Demand vs. Automatic Reporting
Five commenters supported an on-demand reporting system which would
be triggered by specific requests from the Treasury for large position
information on a particular Treasury security. One respondent, however,
favored an automatic, regular reporting system triggered whenever a
reporting entity's holdings in a security reached a certain threshold.
The primary reason expressed by those commenters favoring an on-
demand reporting system was that this approach would be significantly
less burdensome and costly than an automatic reporting system. Many
commenters noted that an automatic reporting method would impose more
complex systems development requirements and greater operational costs
due to the need for daily monitoring of positions across multiple
securities. In addition, automatic reporting could create a
disincentive to buy and hold large positions that exceed a fixed
reporting threshold. Finally, on-demand reporting was viewed by several
respondents as being better able to address price distortions and
provide more useful information since the request for large position
information would be targeted to specific market situations and
security issues.
The respondent favoring an automatic reporting system argued that
on-demand reporting ``would be difficult and costly to communicate to
all relevant parties.'' The commenter also felt that on-demand requests
might trigger unwanted market reactions, while a regular reporting
system ``would provide more consistent monitoring of the market and
would be less confusing to the market over time.''
Definition of Reporting Entity
Six commenters were in agreement that the definition of ``reporting
entity'' should conform with the definition of ``bidder'' as defined in
the uniform
[[Page 65216]]
offering circular.10 The aggregation rule with regard to
affiliates, for example, is a concept with which many market
participants are already familiar and provides an appropriate model for
a large position reporting rule. Similarly, the commenters supported a
process, similar to the ``separate bidder'' process provided for in the
uniform offering circular, by which separately managed entities within
a corporate or partnership structure can request that Treasury
recognize them as separate reporting entities.
\10\31 CFR 356.2 and Appendix A.
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Definition of ``Control''
There was similar concurrence on the definition of ``control.''
Nearly all parties that addressed this issue expressed the view that
control should be evidenced by either proprietary ownership or
investment discretion over a Treasury security. The commenters were in
similar agreement that the concept of ``control'' should not be
extended to merely beneficial ownership or custodians. Specifically,
the commenters held that entities acting as custodians should not be
required to report positions in Treasury securities over which they
have no investment discretion.
Definition of ``Large'' Position
The commenters generally felt that the large position threshold
should be large enough to both detect concentrations of control and
avoid overly burdensome, frequent reporting by market participants.
Opinions were fairly evenly divided on whether a securities position
should be defined as ``large'' based on a percentage of the total
outstanding issue size or a specific dollar amount.
Those preferring a percentage standard commented that this method
is a better indicator of concentration of control than a straight
dollar standard, given the large range of issue sizes among various
maturities. Suggested percentages ranged from 10 percent to 25 percent
of a particular issue. One commenter felt that, if an automatic
reporting system is implemented, the percentage should be consistent
with the Treasury's auction rules, i.e., ``large'' should be defined as
35 percent of the securities awarded in an auction.
Those favoring a fixed-dollar threshold did so on the basis of
clarity, ease of administration, and, consequently, improved
compliance. Suggested dollar thresholds ranged from $2 billion, to
correspond to the net long position reporting threshold for
auctions,11 to $4-5 billion. Some commenters also expressed the
view that the threshold should be larger under an automatic reporting
system than under an on-demand system to minimize the compliance burden
associated with automatic reporting. One commenter said that there is
no need to define ``large position'' in advance under an on-demand
reporting system (the large position threshold would be specified in
the Treasury notice requesting large position reports), and there may
be no ``one-size-fits-all'' threshold.
\11\31 CFR 356.13(a).
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Definition of ``Recently-Issued''
The scope of Treasury's large position reporting authority is
limited to recently-issued and to-be-issued Treasury securities.
Discretion to define the term ``recently-issued'' was given to the
Treasury. Although the commenters differed somewhat on the specifics of
the preferred meaning of ``recently-issued,'' all agreed that it should
include the ``on-the-run''12 (most-recently issued) security of a
particular type. Opinions were fairly evenly divided on whether
``recently-issued'' also should include only the most recent ``off-the-
run'' issue or the two most recent ``off-the-run'' issues. One
commenter said that there is no need to define ``recently-issued''
under an on-demand reporting system.
\12\A Treasury security is considered to be ``on-the-run'' when
it is the newest security issue of its maturity (e.g., in October
the two-year note issued September 30 would be ``on-the-run'' while
the two-year note issued August 31 would be ``off-the-run''). An on-
the-run security is normally the most liquid issue for that
maturity.
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Types of Securities Covered
Based largely upon the presumption that Treasury note and bond
issues are more likely to be ``on special''13 (in short supply)
than bills, two commenters said that bills should be excluded from
large position reporting. One such commenter also cited the complexity,
burdens and costs ``associated with implementing systems to track
positions on weekly-issued securities * * *.'' One commenter, however,
said that all types of Treasury securities (bills, notes and bonds)
should be eligible for reporting, ``since any type of Treasury security
could be the subject of a concentration of control.'' Another commenter
took a more neutral position, saying that excluding bills may be
appropriate, ``but a good case will need to be made that short interest
is always small relative to the net supply, or that supply conditions
and price movements preclude sustained and possibly injurious
squeezes.''
\13\When securities are ``on special,'' market participants
desiring to borrow the particular security must accept an interest
rate significantly lower than the prevailing repo rate for
unspecified collateral. Conversely, the owners of the securities can
finance their position at exceptionally low interest rates.
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Components of a Position
The four commenters addressing this issue agreed as a starting
point that net long settled cash positions should be included in a
``large position.''
Two commenters said that the definition of ``large position''
should be consistent with the definition of ``net long position'' in
the uniform offering circular.14 Both felt that financing
transactions (repos, securities borrowed, etc.) should be excluded from
the large position calculation since it is too difficult to apply the
concept of control to securities used in such transactions. Calculating
a net financing position is particularly difficult, according to one of
the commenters. Examples provided included the problems of
differentiating deliver-out from hold-in-custody and tri-party
repurchase agreements, and of separating overnight repos from term
repos, particularly those with mandatory substitution provisions. Both
of these commenters, however, could support a requirement to report
financing transactions on a gross basis if Treasury believes financings
need to be included.
\14\31 CFR 356.13(b).
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The other two commenters felt that financing transactions should be
included in the definition of a reportable position to encompass a
wider range of transactions from which an entity can exert immediate
control over a Treasury security. Both advocated reporting such
transactions on a gross basis. One commenter noted that a position that
might look flat on a net basis may in fact be exposed if fails become a
problem. Moreover, the commenter contended, matched-book and tri-party
repo activity might result in a small net position, and yet be used as
a tool to achieve a short squeeze.
Recordkeeping Requirements
The issue of what records should be kept by reporting entities was
largely unaddressed except that the commenters felt that these records,
and their associated retention periods, should closely correspond to
records already required to be maintained by reporting entities under
existing securities and banking laws. Most respondents stated that
reporting entities should not be required to keep records in electronic
form, since such a
[[Page 65217]]
requirement could be burdensome for entities that do not have systems
for electronic recordkeeping.
III. Section-by-Section Analysis of Proposed Regulations
A. Section 400.1. Scope of Regulations
A new paragraph is proposed to be added to Part 400 to describe the
statutory basis for the large position rules. The paragraph also states
that the large position rules are located in Part 420.
B. Part 420. Large Position Reporting
1. Section 420.1
Applicability. This section sets out the scope of the large
position recordkeeping and reporting rules by identifying the types of
Treasury securities covered and by defining the universe of entities
potentially affected. Section 420.1 reflects the Department's initial
determination that all marketable Treasury securities--bills, notes and
bonds--should be included within the scope of the rules. However,
arguments have been made that features and characteristics of the bill
market, such as the frequency of issues (i.e., weekly) and reopenings,
the size of bill auctions and the availability of several instruments
that are close substitutes for bills (e.g., various money market
instruments), make it more difficult to accumulate concentrations of
ownership of Treasury bills. Comments are specifically requested on
whether Treasury bills should be included in the large position
recordkeeping and reporting rules.
On its face, part 420 applies to any type of entity, foreign or
domestic, that might control a large position in a specific Treasury
security. This broad construct of potential application is consistent
with the statutory purpose: ``Large position reporting also would be
useful in assuring that regulators can monitor the positions of major
market participants other than government securities brokers or dealers
under certain circumstances. In particular, it will provide assurance
that the government can compel disclosure of position information when
necessary from all large market participants, including a group of
relatively unregulated entities called `hedge funds.'''15 As
described in the preamble discussion of sections 420.3 and 420.4, the
number of entities that may actually be affected by large position
rules is significantly narrowed when the minimum size for a large
position is applied.
\15\H.R. Rep. 103-255, September 23, 1993, at pg. 25.
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We believe it is appropriate to exclude certain entities from the
application of the rules based on the existing availability of position
information on these organizations and/or concerns about the
confidentiality of this information. Accordingly, paragraphs (b) and
(c) of section 420.1 provide exemptions from part 420 to the holdings
of foreign central banks, foreign governments, international monetary
authorities and Federal Reserve Banks (FRBs). The exemptions for the
foreign entities are limited to their respective positions maintained
at the FRBNY. The exemptions are also consistent with the position
expressed by the Senate and House during consideration of the
legislation.16
\16\139 Cong. Rec. H-10967 (daily ed. November 22, 1993)
Statement of Chairman Dingell on S. 422.
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One commenter, responding to the ANPR, expressed concern about
granting exemptions specifically to these foreign entities. However,
the Department believes the proposed approach is appropriate since the
exemptions are limited in their scope by applying only to the portion
of the organization's position that is maintained at the FRBNY. Any
positions held by the exempt entities at locations other than the FRBNY
are not exempted and will be subject to the large position
recordkeeping and reporting rules. The proposed exemption for those
Treasury securities that FRBs hold and control for their own accounts
is also based on the Department's access to this information.
The Department recognizes that on rare occasions it may be
necessary to request large position information on Treasury securities
that are not within the parameters of the proposed definition of
recently-issued (paragraph 420.2(g)) but that are within the scope of
the intent of the statute. For example, in August 1991, Treasury might
have sought large position information on the April 1991 two-year note,
given that the security was still ``on special'' in the repurchase
agreement market and there was a significant concentration of
ownership. While this security, at that time, would have been outside
the scope of the currently proposed definition, the Department believes
it is necessary to reserve the right to collect large position
information in such circumstances. Accordingly, we have included within
the rule a reservation to request information on additional Treasury
security issues consistent with the purposes of the GSAA.
2. Section 420.2
Definitions. This section provides for the definitions of terms
that are integral to the large position rules. Unless otherwise defined
in this section, terms used in part 420 have the same meanings provided
in section 400.3.
``Control''--The concept of control revolves around three elements:
beneficial ownership, possession (custody) and investment discretion.
The beneficial owner is the party with the actual ownership interest in
the Treasury security. The beneficial owner may or may not always be
aware of its ownership position in a given security if it does not
manage its own investments and it may not have possession of the
Treasury securities even if it makes its own investment decisions
(especially likely with book-entry Treasury securities). Possession or
custody is evidenced by an organization's ability to service the
securities directly (e.g., transfer the securities, receive interest
and principal payments). The beneficial owner may perform this function
for its own holdings, but the mechanics of book-entry Treasury
securities require that a depositary institution act in this capacity
on behalf of others at some level in the custody chain for all Treasury
securities. Additionally, book-entry Treasury securities may involve
more than one custodian in the holding of a specific security
entitlement.17 Investment discretion is the authority to make and
execute decisions about the purchase, sale and retention of securities.
In the institutional market for Treasury securities, which is of
critical importance in developing large position reporting rules, the
granting of investment discretion to an investment adviser to manage
all or some portion of an entity's portfolio is common.
\17\The Federal Reserve Banks maintain book-entry security
accounts for depository institutions and other entities such as
government and international agencies and certain foreign central
banks. In their book-entry accounts at the Federal Reserve, the
depository institutions may maintain their own security holdings and
holdings for customers, which may include other depository
institutions, dealers, brokers, institutional investors and
individuals. In turn, the depository institution's customers may
maintain accounts for their customers. This creates a tiered chain
of custodial relationships.
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It is our view that, for the purposes of large position reporting,
the most important criterion in the definition of control is that of
investment discretion. While beneficial owners receive the economic
benefit of holding a Treasury security, frequently, they do not make
the decision to purchase/sell/retain the Treasury security and, as
mentioned, may not, on a day to day basis, be aware
[[Page 65218]]
of their ownership interest. Since a purpose of large position
reporting is to understand better any pricing anomalies for a
particular Treasury security issue in a timely fashion, defining
control based on beneficial ownership would not be particularly useful
because a reporting entity could have difficulty assembling the
information needed to file a large position report and would be
potentially unaware of the reasons why the security involved was
purchased.
Likewise, custody (without investment discretion) does not provide
a good basis for determining control. A definition based on custody
would most certainly involve multiple reporting of the same security
position since each tier in the custody chain would be required to
report. This approach would diminish the value of any large position
reports received. Also, because under these circumstances the custodian
would not be a party to the investment decision, reporting on the
positions held in safekeeping would shed very little light on the
objectives of the investor.
Therefore, Treasury has decided to define control as the authority
to exercise investment discretion. This definition is supported in six
of the seven comment letters. Investment discretion can be exercised by
the beneficial owner, a custodian or an investment adviser. The party
responsible for making investment decisions, regardless of where it is
in the tiered system, is the most relevant reporting entity for large
position reporting since the actions and objectives of the decision
maker are what we are trying to determine. A single party exercising
investment discretion for multiple beneficial owners could control a
potentially large amount of Treasury securities without any single
beneficial owner having a reportable position. Additionally, such
investment advisers could possibly distribute custody of the securities
in a manner that would keep any individual custodian below the
reporting threshold. However, using the exercise of investment
discretion as a measure of control, an investment adviser's aggregate
positions would be reportable regardless of the number of beneficial
owners or custodians involved and would be treated separately from any
positions over which the beneficial owners had retained investment
discretion. Finally, a definition of control based on investment
discretion is consistent with the treatment of investment advisers
under the uniform offering circular.18
\18\Treasury intends to clarify this treatment in a proposed
rule in the near future.
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Following this definition, an investor would only be responsible
for reporting its proprietary holdings if it retained investment
discretion over the positions. This approach would avoid double
reporting of these positions. Additionally, a custodian would only have
responsibility for reporting on any large positions for which it had
investment discretion. A custodian would not have any obligation to
report on positions for which it maintained securities solely in a
safekeeping capacity.
``Reporting Entity''--This term is defined to be consistent with
the definition of a bidder in the uniform offering circular.19
This concept provides for the treatment of all affiliated entities as a
single entity for purposes of determining the quantity of Treasury
securities controlled. Additionally, the definition permits specific
affiliates to be treated separately or ``carved-out'' from the
reporting entity based on stated principles of separateness.
\19\See supra note 10.
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Applying this approach, a ``reporting entity'' will aggregate each
of the positions in a specific Treasury security that is held by itself
and all affiliates that control positions, and will report a single
position to the FRBNY. Any affiliate that exercises independent
investment discretion, and whose position information is not available
to other affiliates, will be permitted to report separately from the
overall entity provided it has requested such a ``carve-out'' and
received written recognition from the Treasury. Merely establishing
``Chinese walls'' or similar procedures is not sufficient. If an entity
has already received such written recognition under the uniform
offering circular, it will not have to reapply for the purposes of
large position reporting.
Defining the term ``reporting entity'' based on the bidder concept
from the auction rules has the advantage of relying on an existing body
of regulations, thus minimizing confusion and the need for market
participants to learn new rules. The bidder definition is well known to
most large participants in the Treasury market (from their auction
participation) and has functioned effectively since March 1993 when the
rules were implemented. This approach was also endorsed in four comment
letters.
This definition also introduces a new term, ``aggregating entity,''
which is defined separately. An aggregating entity is a single legal
entity (e.g., a parent company or affiliate within a reporting entity)
that may control elements of a large position. If an aggregating entity
has no affiliates, then it is also a reporting entity. Each component
of a reporting entity is individually an aggregating entity.
``Reportable Position''20--The scope of the definition of
reportable position directly affects the complexity of calculating such
a position and the amount of time needed to file a large position
report. The definition of a reportable position should be broad enough
to encompass the most significant ways that an investor may control a
Treasury security issue, balanced against the difficulty and cost of
compiling the information. Additionally, because of the complexity in
defining this term, it is useful to base the definition, to the maximum
extent feasible, on concepts familiar to market participants.
\20\A reportable position for the purposes of the large position
rules differs from a reportable position for purposes of the uniform
offering circular. In the uniform offering circular, a reportable
net long position is a position that has met the necessary criteria
to be reported on a tender. In the context of the large position
rules, a reportable position defines the components of a potential
large position.
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For participants in the Treasury securities market, a familiar
concept is that of ``net long position'' in the uniform offering
circular.21 The uniform offering circular definition includes the
par amount of: (1) Immediate (cash) positions; (2) when-issued
positions for to-be-issued and reopened issues; (3) forward settling
positions; (4) positions in futures contracts requiring delivery of the
specific security; and (5) STRIPS (Separate Trading of Registered
Interest and Principal of Securities) principal components of the
specific security. This is an appropriate place to begin development of
a reportable position because it is not only familiar to many market
participants but also includes the most common elements of control in
the cash market. The combination of these five elements is defined as
the net trading position--the first component of a reportable position.
\21\See supra note 14.
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The Department is requesting that commenters specifically address
the treatment of forward positions. While forward positions are a
component of the net long position defined in the uniform offering
circular, there may be reasons to exclude them from the definition of
reportable position because forward positions may be less effective in
controlling a security or may act to conceal settled positions. For
example, the proposed large position rules permit a reporting entity to
reduce the size of its settled position by the amount of a
[[Page 65219]]
short forward settling position. Should this treatment be permitted?
Treasury especially welcomes the views of market participants on this
subject.
Options and certain futures contracts (i.e., cash-settled or those
requiring delivery of securities other than the specific security that
is the focus of large position reporting) continue to be excluded
because they do not provide the holder with either immediate control or
an effective way to manipulate the price of a specific security. For
options, an entity would only gain control of the security at the time
the position is exercised, at which time the security would become a
component of a reportable position. Large positions in the excluded
futures contracts are already reported to the Commodity Futures Trading
Commission.22 Thus, this information will be available to the
Department and other regulatory agencies, if needed, without imposing
additional reporting requirements.
\22\17 CFR Parts 15 to 18.
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Financing transactions are proposed to be included in a reportable
position because of the important influence they have on the available
supply of a Treasury security. The legislative history behind the large
position reporting authority supports the inclusion of financings,
especially repurchase agreements.23 The approach for including
financing transactions is addressed below in the definition of a gross
financing position. The gross financing position is the second
component of a reportable position.
\23\See supra note 15 at pg. 44.
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Finally, the Department believes that a third component--
``fails''--should be included in the definition of reportable position.
An investor's net fails position (fails to receive less fails to
deliver) indicates ownership rights to a security without the cost of
financing. All fail positions should be included without
differentiating between types of counterparties (i.e., broker-dealers,
customers). A large ``fail-to-receive'' position may exacerbate, or
benefit from, a squeeze by maintaining high demand for a specific
security. In analyzing existing market discontinuities, the knowledge
of the existence of any large net fail-to-receive positions could help
determine the cause and potential resolution of a tight supply
condition.
Commenters are also requested to address the treatment of fails.
Specifically, the Department is interested in receiving comments on
whether the proposed treatment of fails positions is more appropriate
than excluding fails from the determination of a large position and
instead requiring submitters of large position reports to disclose
information about fails as a memorandum entry. Since a position that
remains unsettled after its scheduled settlement date is not included
in the computation of a net trading position, including fails may act
to artificially increase the size of the reported position. This result
is apparent if fails-to-deliver were to be a positive addition to a
reportable position since a past settlement date short trade, unlike a
short forward position, would not reduce the size of an entity's
reportable position. Additionally, commenters are asked to consider
whether fails should be treated differently from forwards given their
similarities.
The sum of the net trading position, gross financing position and
the net fails position is a reporting entity's total reportable
position.
``Gross Financing Position''--To achieve the statutory intent,
financing transactions should be included in a reportable position. The
more difficult question is how to include them. Within the generic
construct of financing transactions, there are multiple types of
transactions including: repurchase and reverse repurchase agreements,
securities borrowed and loaned, securities pledged and received in
pledge, and any other form of credit collateralized by Treasury
securities.
Since the intent of large position reporting is to obtain
information about the control of Treasury security positions, an
effective approach for incorporating financing transactions is to
include them on a gross basis (no netting) in the reportable position
of the entity that has received the securities. Under this approach,
the seller/lender of the securities would not include the financing
transaction in its calculation of the gross financing position since it
would already have reflected the positions that provided it with
control of the securities (i.e., cash positions, reverse repos) in the
calculation. Reporting in this manner would provide regulators with
information about the broader universe of market participants that had
possible control of the Treasury security, regardless of how they might
have subsequently financed or transferred it.
No differentiation is made in the computation between the types of
financing transactions (e.g., repos, securities lending) since, despite
different legal frameworks, they are generally equally effective ways
of obtaining control. The first part of the gross financing position
computation also does not differentiate between types of repos (e.g.,
overnight, term). As an example, a security that has been received
through a reverse repo and contemporaneously repoed out to a third
party will be included at the gross par amount of the reverse in the
entity's long position. Gross reporting yields this result even though
the security was no longer in the possession of the reporting entity
since it had been contemporaneously repoed out. The proposed approach
will result in the potential for multiple entities including a position
for the same specific Treasury security in their respective
computations and reportable positions. However, the resultant double
counting is not considered to be a problem because it provides
additional information about entities that have various legal claims to
the security and that may potentially benefit from any possible market
disruptions.
An optional exclusion is proposed that will permit a reporting
entity to voluntarily exclude from the computation of its gross
financing position certain securities received through financing
transactions. This exclusion would apply to situations in which the
securities received were subject to a right of substitution on behalf
of the delivering counterparty, tri-party custodial relationships, or
custody of the securities being retained by the party granting the
legal interest in the securities (hold-in-custody). These Treasury
securities would be eligible for exclusion based on a presumption that
the receiving organization did not have effective control of the
securities despite having ``received'' them. The exclusion is optional
because its use, while benefiting the entity taking advantage of it,
does not diminish the usefulness of the resultant large position
reports. If it were made mandatory, many potential reporting entities
might find it too costly and burdensome to differentiate information on
financings at this level of detail. If the amount excluded is large
enough to cause the reporting entity to fall below the reporting
threshold, then a report should not be filed.
The gross financing position is then combined with the other two
components of a reportable position to determine the total reportable
position held by a reporting entity. For purposes of the calculation,
all positions would be valued at the par amount of the securities
involved.
``Large Position Threshold''--The large position threshold is the
dollar amount of a reportable position at or above which the
requirement to file a large position report is triggered. Since
[[Page 65220]]
the large position rules take an ``on-demand'' approach to reporting,
the specific large position threshold for any given Treasury security
issue may vary. However, since the threshold would not be known in
advance, we believe that it will be beneficial to provide some
certainty to market participants by setting a minimum dollar amount
(``floor'')--$2 billion--below which reports would not be requested.
Establishing a floor should minimize compliance costs. For example,
many entities, based on this level of the floor, may decide that no
modifications would be needed to their computer systems or trading
strategies since the rule would not apply to them (i.e., the firms
would not expect their positions ever to reach the floor amount). Of
the six commenters who addressed this issue, three endorsed a variable
threshold method (one respondent actually supported a fixed percentage
method, which would lead to a variable dollar level since it would be
based on the amount issued of a specific security).
``Recently-Issued''--Despite the determination that any large
position reporting would be done on an on-demand basis, the Department
believes that it is useful to set out a general description of which
Treasury securities would be within the scope of the rule. For
convenience, the definition of recently-issued includes when-issued
securities from the time of announcement of the issue. Thus, when-
issued securities would be considered the most recent issue of a
security type. In response to the commenters and in consideration of
the Treasury securities that could be of most interest to regulators,
we have proposed that as a regular matter, recently-issued would be
limited to the three most recent issues of a Treasury security (bill,
note or bond) if issued quarterly or more frequently and the two most
recent issues if issued less frequently. Currently, this latter
condition exists only for the 30-year bond. The definition of recently-
issued for this security, which is currently issued semi-annually, was
limited to the two most recent issues because a three-most-recent
definition would have, on a regular basis, encompassed a time period of
nearly a year and a half. As discussed earlier, the Department intends
to reserve the right to broaden the scope of this definition, on a
limited exception basis, consistent with the purposes of the GSAA.
3. Section 420.3
Reporting. The provisions of this section require large position
reports to be filed by the designated filing entity of any reporting
entity that has a reportable position that equals or exceeds the large
position threshold in a particular Treasury security issue as specified
by the Department. This section also specifies the method by which
Treasury will provide notice to the marketplace requesting large
position reports, the specific information that must be provided on the
large position reports, where they must be filed and the time frame for
their submission. This section also permits either the Treasury or the
FRBNY, acting as the Treasury's agent, to request additional
information from a reporting entity if either organization, after
analyzing the large position reports, requires further data to gain a
more complete understanding of the extent and nature of the
concentration of positions in a particular Treasury security. A sample
reporting format for large position information is illustrated in
Appendix B to the rule.
Analysis of Alternative Reporting Methods
The method of reporting large positions is a central issue in the
development of large position rules, since the method selected will
significantly affect the compliance burdens of, and costs incurred by,
the entities subject to the large position regulations.
The Department evaluated two distinct approaches for reporting
large position information: an ``automatic'' or regular reporting
method and an ``on-demand'' reporting method. Under an automatic,
regular reporting process, large position reports would be required to
be filed whenever a reporting entity equalled or exceeded the large
position threshold stated in the rules for any covered Treasury
security. Depending upon the particular method used in a regular
reporting system, reports could either be required on a one-time basis
or they could continue to be required each day the entity exceeded the
large position threshold and would cease only when its positions in the
Treasury security fell below the threshold level. In contrast, in an
on-demand reporting system, reports would be triggered by a notice from
the Treasury requesting large position information on a specific issue
of a Treasury security from those reporting entities whose positions at
that time equalled or exceeded the large position threshold specified
in the notice.
In evaluating the method of reporting that should be employed, the
Department took into consideration the events that gave rise to
Congress' grant of authority to prescribe large position reporting
rules as well as the purposes and objectives of the statutory authority
underlying such rules. The main focus of our analysis involved
selecting the approach that best balanced the purposes of the statute
and any new regulatory burdens that would be created. (Readers are
referred to the ANPR for a more detailed discussion of these issues and
other background information pertaining to large position
reporting.)24
\24\See supra note 5.
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The primary purpose of any large position reporting system is to
enable the Treasury and the other regulators to understand better the
possible reasons for apparent significant price distortions and the
causes of market shortages in certain Treasury securities. Large
position reports are also intended to provide regulators with
information on concentrations of control for market surveillance
purposes and for enforcement of the securities laws, as well as to
enable Treasury policy makers to make better decisions concerning any
possible government actions that might be taken in response to apparent
price anomalies. A critical factor in evaluating the two alternative
large position reporting methods was the extent to which they would
meet the overriding legislative and policy objective of strengthening
the ability of the regulatory agencies to deter possible manipulation
of the Treasury securities market.
On-Demand Reporting System
The requirements outlined in paragraph 420.3(a) reflect the
Department's decision to propose an on-demand reporting system for
large position information. Reports would be required in response to a
specific request, issued by the Treasury, for large position
information.
An on-demand reporting approach will enable the Department to
target large position reporting to a specific issue of a Treasury
security in response to particular circumstances or unusual market
activity. This would ensure the availability of information for market
surveillance and enforcement purposes in those specific instances where
it is most needed, thus satisfying the primary objective of this
regulatory authority, while obviating the need to collect information
on securities that are not of interest. In contrast, under a regular
reporting system, reports would be required when the large position
threshold had been exceeded; therefore, reports would be filed even in
situations where there were no price distortions, anomalies or evidence
of possible
[[Page 65221]]
market manipulation. This would result in unnecessary costs for, and
burdens on, both market participants and the government. In addition, a
regular reporting method could increase the possibility that investors
would take deliberate actions to reduce their holdings of Treasury
securities to avoid exceeding the ``large'' position reporting
threshold. This could result in decreased market participation, reduced
liquidity and increased borrowing costs.
An on-demand reporting system would avoid the need to set a uniform
large position threshold that would apply to some or all Treasury
issues as would be required under an automatic reporting approach. The
Treasury would have the flexibility and latitude to establish a tailor-
made large position threshold each time it requests large position
reports. This permits a large position threshold to be based on the
latest supply of, and market conditions for, a specific Treasury
security, which can vary considerably.
On-demand reporting should be less onerous and costly for market
participants. Any modifications to existing computer systems to
compile, summarize, compare and report the positions would be less
complex than for the required continual review of multiple securities
positions under a regular reporting method. Under a regular reporting
approach, firms would need to modify existing computer systems or
develop entirely new systems to continuously collect, monitor and
report positions in when-issued and recently-issued Treasury
securities. Since reports would need to be filed whenever positions
equalled or exceeded the large position threshold, the systems would
have to be designed to compute the overall positions in a large number
of separate Treasury security issues (approximately 23 separate
CUSIPs25 based on the definition of recently-issued in paragraph
420.2(g)) and then compare the amount of the positions to the large
position threshold on a daily basis to determine if reports would have
to be produced. There would be an even greater burden on those entities
that would manually compile this information.
\25\The CUSIP number is the unique identifying number assigned
to each separate security issue and each separate STRIPS component.
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Recognition of the costs that would be imposed on market
participants has been a critical consideration in our attempt to
develop large position rules that strike a balance between regulatory
oversight and market efficiency. We believe that an on-demand reporting
system significantly minimizes the regulatory costs and burdens on
market participants compared to those that would be incurred if the
Treasury were to require regular reporting.
In analyzing the different reporting models, the Treasury also took
into consideration the fact that a large segment of market participants
who are likely to be subject to Treasury's large position reporting
rules--the 37 primary dealers--already submit regular position reports
to the FRBNY on a voluntary basis for on-the-run Treasury notes and
bonds. By adopting an on-demand reporting system, we have attempted to
minimize, as much as possible, any duplicate reporting by these
entities.
Triggering Event: Treasury Request for Information
The provisions of paragraph 420.3(a) propose that the requirement
to report large position information would be triggered by a notice
issued by the Treasury specifically requesting such information. The
notice would identify the specific Treasury security issue to be
reported, the applicable large position threshold (in no case less than
$2 billion) for that issue and the date or dates26 as of which the
large position information must be reported.
\26\To understand the price and supply dynamics of the security
under scrutiny better, the Treasury reserves the right to request
that entities submit positions covering a multi-day, historical time
frame rather than just one day.
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The notice requesting large position reports would be communicated
by issuing a press release and subsequently publishing the notice in
the Federal Register. Given the relatively short reporting deadline in
the proposed rules, this two-pronged notice approach satisfies the dual
objectives of operational efficiency and legal sufficiency. A Treasury
press release has the advantage of achieving wide, timely distribution
of the notice without a significant time lag. Although this approach
relies on third-party services over which the Treasury has no control,
it is reasonable to expect that the major news and financial
publications and the various electronic financial wire services (e.g.,
Telerate, Reuters, Bloomberg, Knight-Ridder) would disseminate the
Treasury notice as quickly as their respective technological
capabilities allow. The electronic financial wire services and news
publications can also be relied upon to accurately present the
Treasury's request for large position information. We believe that any
market participant, including a foreign entity, that may control a
large position in a Treasury security is likely to subscribe, or have
access, to one or more of the electronic financial wire services. Thus,
the likelihood that the Treasury notice requesting large position
reports would fail to come to the attention of a potential reporting
entity is extremely remote.
The press release would include information about how to obtain a
sample large position report and the name and telephone number of a
Departmental contact person to answer questions about the report.
Since the Federal Register is the designated federal publication
for providing official notice, publishing the Treasury notice in that
document is legally sufficient for ``constructive notice'' of the
request despite lagging the issuance of the press release.
Designated Filing Entity
Under paragraph 420.3(b), the designated filing entity is
responsible for preparing and submitting the large position reports on
behalf of a reporting entity in response to a Treasury notice
requesting large position information. The identity of the designated
filing entity must be given on any large position report submitted.
Each reporting entity, as defined in paragraph 420.2(i), whose
reportable position equals or exceeds the large position threshold,
must have one, and only one, designated filing entity. A reporting
entity that consists of only one component is the designated filing
entity. For those reporting entities that consist of multiple
affiliates or aggregating entities, one entity must be selected to be
the designated filing entity. That entity is responsible for receiving
and compiling the large position information from each of the
aggregating entities, computing the reportable position and preparing
and filing the large position report.
An official authorized to file reports on behalf of the designated
filing entity shall sign the large position report and certification
attesting to the accuracy, completeness and reliability of the
information being reported. This official must be one of the following:
the chief financial officer, the chief operating officer, the chief
executive officer, or the managing partner or equivalent of the
designated filing entity. The contact person named on the large
position report should also be a representative of the designated
filing entity but need not be the authorized official.
Further, any designated filing entity is required, under the
applicable provision in section 420.4, to make and maintain
[[Page 65222]]
additional records on behalf of the entire reporting entity.27
\27\ Since designated filing entities are also aggregating
entities, they would also be required under Secs. 420.4(b) or (c) to
maintain records pertaining solely to their own securities
transactions.
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Information Required on Large Position Reports
Paragraph 420.3(c), together with Appendix B, sets forth the
specific information that must be provided in the large position
report. For those reporting entities that have a number of aggregating
entities or affiliates, the amount to be reported for each of the
positions is the total, combined net amount. All positions are to be
reported as of the close of the business/transaction day for the date
specified. In those instances where Treasury requests positions
covering multiple dates, separate reportable position calculations must
be submitted for each date. The rule does not require, nor does the
Treasury intend, for firms to calculate their positions as of some
specific point during the trading day. However, in order to meet the
deadline for reporting, the designated filing entity may need to
determine a cut-off time for foreign entities.
The following administrative information must be provided on the
large position report:
(a) The name of the reporting entity;
(b) The address of the principal place of business of the reporting
entity;
(c) The name and address of the designated filing entity;
(d) The description of the Treasury security being reported,
including the CUSIP number;
(e) The date or dates for which the information is being reported
(which should be the same date(s) as that (those) stated in the
Treasury notice requesting the large position reports);
(f) The date the report was submitted;
(g) The name and telephone number of a contact person of the
designated filing entity to whom questions can be directed regarding
any information on the report;
(h) The name and title of the person authorized to submit the
report (as previously described);
(i) A certification statement attesting to the accuracy,
completeness and reliability of the information being submitted; and
(j) The signature of the authorized official specified in (h).
The following large position information must be reported in the
exact order as noted:
(a) Line 1, cash/immediate net settled positions;
(b) Line 2, net when-issued positions for to-be-issued and reopened
issues;
(c) Line 3, net forward settling positions, including next-day
settling positions;
(d) Line 4, net positions in futures contracts that require
delivery of the specific security that is the subject of the large
position report (but not futures contracts for which the security that
is the subject of the large position report is one of several
securities that may be delivered and not futures contracts that are
cash-settled);
(e) Line 5, net holdings of STRIPS principal components of the
specific security that is the subject of the large position report;
(f) Line 6, the gross financing position, which is the sum of the
gross par amounts of a security issue received from financing
transactions (e.g., reverse repurchase transactions, bonds borrowed,
securities received in pledge and collateralized credit extended);
(g) Line 7, net fails position, which is fails to receive less
fails to deliver in the specific security issue; and
(h) Line 8, Total Reportable Position, which is the sum of lines 1-
7.
All amounts must be reported in millions at par value. See Appendix
B for a sample reporting format.
The large position report provides for two memoranda entries.
Memorandum Entry #1 is the sum of the gross par amounts of a security
issue delivered as part of a financing transaction (e.g., repurchase
agreements, securities loaned, securities pledged and collateralized
loans). This amount should not be included in the gross financing
position (line 6) as noted in item (f) above. Memorandum Entry #1 is
required.
Memorandum Entry #2 is to be reported by those entities that take
the voluntary exclusion pursuant to paragraph 420.2(c) to reduce the
gross financing position reported on line 6. The amount shown is the
amount of securities received from financing positions over which the
reporting entity does not have effective control due to arrangements
such as third-party custodial structures, hold-in-custody relationships
or substitution rights. This amount should not be included in the
amount reported on line 6.
Lines 1-5 of the large position report are consistent with the
items that determine the net long position for auction reporting
purposes.28 As with the auction rules, the amounts to be reported
for each of the items on lines 1-5 are the net of any long and short
positions, so that the entry can be a positive number (long position),
a negative number (short position), which should be shown in
parentheses, or zero (flat position). Only securities trades that have
actually settled should be included in line 1, cash/immediate net
settled positions. Accordingly, auction purchases that have not yet
been settled or issued should be included in the total reported on line
2, when-issued positions.
\28\See supra note 14.
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For line 6, Gross Financing Position, netting of these positions is
not permitted although certain items may be excluded. (See paragraph
420.2(c).) For reporting entities that take advantage of this limited
exclusion, the gross financing position should not include the amount
of security issues received from financing positions over which the
reporting entity does not exercise control. Rather, the amount
associated with the exclusion should be reported in the Memorandum
Entry #2.
Line 7, Net Fails Position, can only be reported as a positive
number (which indicates fails to receive exceed fails to deliver) or
zero (which reflects fails to receive are totally offset by, or are
less than, fails to deliver).
Reporting Format
Rather than designing and mandating a specific reporting form, the
Treasury is proposing to allow the reporting entities to develop their
own large position reports, provided the reports contain all of the
required information as prescribed in the rules, in the order stated in
Appendix B. By permitting the reporting entities to design their own
large position report, firms will be able to integrate the report into
their existing systems as they see fit and avoid the unnecessary burden
of transferring the information from internally generated reports to a
Treasury-mandated form. While firms will have a certain amount of
latitude and discretion in designing a large position report, the
information on the various positions that constitute the total
reportable position must be reported in the order shown in paragraph
420.3(c) and in the sample/prototype report in Appendix B. This will
facilitate analysis of the data. Failure to include any of the required
information, including administrative information, on the large
position report will constitute non-compliance with the rule.
Filing of Large Position Reports: Where, When and How
Pursuant to paragraph 420.3(d) the large position report must be
submitted to the FRBNY. The report must be received before 12:00 noon,
Eastern time, on the second business day after
[[Page 65223]]
the issuance of the Treasury press release requesting large position
reports. Given that large position reports would generally be requested
by the Department in response to certain market conditions or activity,
the proposed rule has a fairly short response time for submission of
the reports. The one and one-half day reporting deadline balances the
need for timely information with the recognition that some time is
required to compile the information. The reporting time frame should
not present significant problems since the information would be derived
from records required to be maintained by the reporting entities.
Additionally, we understand that most large firms engaged in the
securities business compile their positions on a daily basis. Finally,
since reporting is ``on-demand,'' the filing of a large position report
will be an exceptional event not requiring regular preparation.
The Treasury requests comments from market participants on the
proposed reporting time frame, specifically concerning any potential
obstacles, burdens or other factors that would make meeting the
deadline problematic, and the extent of any extra costs that would be
incurred.
The rule, in paragraph 420.3(d), also provides that the large
position report may be filed in any manner or media (i.e., hard copy,
facsimile or other electronic transmission) that is acceptable to the
FRBNY. As mentioned earlier, the reporting entities are permitted to
produce or generate their own large position reports.
Follow-Up Inquiries
The requirement to file a large position report in response to a
specific Treasury notice requesting this information is expected to be
an occasional event. The requirement is satisfied upon receipt of the
report by the FRBNY within the required time frame and in the required
format as prescribed in paragraph 420.3. The proposed rule does not
impose a continuous reporting requirement. However, the Treasury and
the FRBNY staff may contact a designated filing entity after receiving
a large position report to discuss any aspect of the report, seek
clarification of the information provided or request additional
documents or information. The purpose of such inquiries or requests for
data would be to understand the concentration of positions better. The
Treasury or the FRBNY staff may also request further detail on any
position reported, such as breaking out the gross financing position
into its component parts or identifying repurchase agreements by their
terms or types (e.g., overnight repos, term repos, tri-party repos,
hold-in-custody repos). Reporting entities are required to make good
faith attempts to respond to inquiries and provide any additional data
requested in an expeditious manner.
Testing of Large Position Reporting Systems
The Department wishes to underscore the importance of accurate,
reliable and timely reporting of large position information by affected
market participants. As the agency of the Federal government most
concerned with minimizing the interest cost on the public debt, the
Treasury believes that the United States is best served by a liquid and
efficient market for Treasury securities that is not overburdened with
regulation, but, at the same time, is not viewed as being subject to
manipulation. In developing these proposed rules, the Treasury has
attempted to pursue a modest approach that balances the need for
additional regulation with a desire to minimize the burdens on, and
costs to, the industry and to preserve the efficiency of the Treasury
securities market.
Compliance with these large position rules--the maintenance of
reliable records and the accurate and timely reporting of large
position information--is essential to preserving and strengthening the
integrity of the Treasury securities market. One of the primary
concerns with an on-demand reporting system is the increased potential
for inaccurate or incomplete information on large positions due to
unfamiliarity by market participants with the reporting requirements.
Large position information will be extremely important for policymakers
at Treasury, in consultation with other regulatory officials, in
determining whether, and what course of, action should be taken to
alleviate a concentration of control in a particular Treasury security.
Thus, it is imperative that market participants fully understand and
comply with the large position recordkeeping and reporting
requirements.
To ensure that market participants remain knowledgeable about the
rules, specifically how to calculate and report a reportable position,
the Treasury intends to ``test'' the reporting system by requesting
large position reports at least annually, regardless of market
conditions for a particular security. The Treasury does not intend to
notify market participants that its request for large position reports
is merely a test. Commenters are asked to address this proposed
treatment of ``test'' reporting. The notice and reporting requirements
are proposed to be identical to a call for large position information
in which the Department is concerned about price anomalies and
concentrated ownership. ``Test'' reporting is consistent with the
statutory purpose since the Department believes it is both necessary
and appropriate to help ensure that an on-demand program of large
position reporting is conducted effectively.
4. Section 420.4
Recordkeeping. Section 15C(f)(2) of the Securities Exchange Act of
1934 authorizes the Secretary to promulgate rules requiring large
position holders to make and preserve records related to large position
reporting requirements. Section 420.4 sets forth the proposed
recordkeeping rules supporting large position reporting under that
authority. The proposed recordkeeping rules are divided into two
classes: (1) records required for entities that are currently subject
to recordkeeping rules of federal securities or federal bank regulators
(paragraph 420.4(b)); and (2) records required for all other entities,
such as hedge funds, insurance companies, and pension funds (paragraph
420.4(c)).
Under paragraph 420.4(a)(1), the recordkeeping rules would apply to
all aggregating entities that may control components of their
respective reporting entity's reportable position as of the effective
date of the final large position rules, but only if the aggregating
entities' respective reporting entity had a reportable position in any
Treasury security equal to or in excess of $2 billion (the minimum
large position threshold) at any time during the prior two-year period
ending 90 days after publication of the final rule. Thus, all reporting
entities (through their respective aggregating entities) will be
responsible for determining whether they have controlled a reportable
position of at least $2 billion in a Treasury security during the two-
year period. For some firms, this will necessitate a thorough review of
their records to determine if their reportable positions reached that
level.
In addition, under paragraph 420.4(a)(2), in instances where a
reporting entity controlled a reportable position of at least $2
billion in a Treasury security during the two-year period, its
designated filing entity will be required to submit a letter to the
FRBNY certifying that it has in place, or will have in place by the
effective date of the final rules, a recordkeeping system (including
policies and procedures) capable of making, verifying the accuracy of,
and preserving the requisite records. This
[[Page 65224]]
letter must be signed by one of the following officials of the
designated filing entity: the chief financial officer, the chief
operating officer, the chief executive officer, or the managing partner
or equivalent. The letter must be received by the FRBNY within 120 days
after publication of the final rule.
The Department believes this requirement would ensure that entities
having a history of controlling large Treasury securities positions
would have supporting records in place in the event their reportable
positions reach an announced large position threshold for a specific
issue, thereby triggering the submission of a large position report.
These potential large position holders would have several months to
develop methods to meet the proposed recordkeeping requirements since
there will be a delayed effective date for the rules. Subsequent to the
effective date of the rules, aggregating entities within a reporting
entity that had not previously had a reportable position in a Treasury
security equal to or greater than $2 billion but whose reportable
position reaches or exceeds $2 billion would be subject to the large
position recordkeeping requirements from that point forward.
Regardless of the date aggregating entities become subject to the
recordkeeping rules, their being subject to the rules is based on
whether the reportable position of their reporting entity reaches the
large position threshold, not on whether the position of the
aggregating entity itself reaches that threshold. Thus, an aggregating
entity may be subject to the recordkeeping rules even though its own
position has been substantially below the threshold.
Entities Subject to Recordkeeping Rules of Federal Securities or
Federal Bank Regulators (Paragraph 420.4(b))
In developing the proposed recordkeeping rules, the Department
sought to strike an appropriate balance between ensuring that large
position holders maintain records that document and facilitate the
generation of accurate reports and minimizing recordkeeping burdens on
large position holders. Accordingly, the Department examined existing
securities-related recordkeeping rules of the SEC, the Treasury, and
the bank regulatory agencies to determine if the records required under
those rules include the type of information necessary to create large
position reports.
Specifically, the Department examined the following recordkeeping
regulations: SEC recordkeeping regulations applicable to registered
broker-dealers, registered investment advisors, and registered
investment companies; Treasury recordkeeping rules applicable to
registered government securities broker-dealers, financial institutions
that have filed or should file notice as government securities broker-
dealers, and depository institutions that hold government securities as
custodians; and bank regulatory agency recordkeeping rules applicable
to banks that conduct securities transactions for customers.29
\29\17 CFR 240.17a-3, 240.17a-4, and 240.17a-7 (for registered
brokers and dealers); 17 CFR 275.204-2 (for registered investment
advisers); 17 CFR 270.31a-1, 270.31a-2, and 270.31a-3 (for
registered investment companies); 17 CFR 404.2 and 404.3 (for
registered government securities brokers and dealers); 17 CFR 404.4
(for noticed financial institutions); 17 CFR 450 (for depository
institution custodians that exercise investment discretion); and 12
CFR Part 12, Part 208, or Part 344 (for banks conducting securities
transactions for customers), respectively.
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The Department has determined that all of these recordkeeping rules
require the affected entities to make and keep records of original
entry (i.e., journals, blotters, or similar records) containing
itemized records of all of the entities' securities transactions,
including information pertaining to the amount and identification of
each security or instrument. Records of original entry are basic,
detailed records that cover, among other things, all transactions
related to the components of a reportable position. Most of the
existing regulations of the federal securities and federal bank
regulators also require the affected entities to maintain order tickets
or memos and various ledgers containing much of the same information
required in the records of original entry.30
\30\Most of the existing recordkeeping rules also require
affected entities to maintain position records, which provide a
composite listing of the long and short positions in each security
for which the broker-dealer or other entity is responsible. However,
position records do not include information on positions resulting
from certain unsettled and off-balance sheet transactions (e.g.,
when-issued trades and futures).
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The proposed treatment of depository institutions that exercise
investment discretion warrants specific discussion with respect to
recordkeeping requirements because such entities are potential
reporting entities. Depository institutions that exercise investment
discretion are generally subject to the securities recordkeeping
requirements of the bank regulatory agencies (12 CFR 12, 12 CFR 208, or
12 CFR 344), regardless of whether or not they exercise investment
discretion within their trust departments.
In addition, for those rare cases in which depository institutions
exercise investment discretion and act as custodians of government
securities outside of their trust departments, the recordkeeping
provisions of paragraph 450.4(c) of the GSA regulations also
apply.31 The Department views the information required by the
recordkeeping rules of paragraph 450.4(c) as comparable to the basic
information required in the records of original entry under the
existing rules of the SEC, the Treasury, and the bank regulatory
agencies.
\31\Recordkeeping requirements for depository institutions
acting solely as custodians were not considered because these
entities do not meet the proposed definition of having control under
paragraph 420.2(b).
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The Department believes that reportable positions can be
constructed relatively easily from the aforementioned records required
by the federal regulatory agencies. As a result, the Department has
decided, with respect to large position rules, not to propose any new
recordkeeping rules for aggregating entities that are: (1) subject to
the existing federal recordkeeping requirements, and (2) not designated
filing entities.
However, an aggregating entity that is also a designated filing
entity would be required to maintain specific large position-related
records in addition to its existing securities-related records. (Each
reporting entity would have only one designated filing entity.) First,
the designated filing entity would be required to make and maintain
copies of all of the large position reports it filed. Also, since the
designated filing entity, in some cases, would have to collect and
combine information received from other aggregating entities within its
reporting entity, the designated filing entity would be required to
make and maintain supporting documents or schedules (e.g., worksheets)
that are used to compute the reportable position and to prepare large
position reports. The designated filing entity would also be required
to make and keep a chart showing the organizational entities (e.g.,
aggregating entities, if applicable) whose data is combined for
purposes of calculating a reportable position.
The Department believes that requiring supporting schedules would
enhance the ability of the designated filing entity to produce accurate
and timely large position reports. Moreover, the retention of
supporting schedules and organizational charts would be indispensable
in responding to follow-up inquiries from the regulatory agencies and
in the course of any in-depth review or reconstruction of a reporting
entity's reportable position conducted by the Treasury, the FRBNY, or
the SEC.
[[Page 65225]]
Designated filing entities would be required to retain the
additional records for the same period specified in their existing
securities-related recordkeeping rules.32 In instances where
recordkeeping rules contain more than one retention period (e.g., SEC
Rule 17a-4), paragraph 420.4(b)(4) of the proposed rule specifies that
the longest retention period will apply.
\32\See supra note 29.
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Other Entities (Paragraph 420.4(c))
Certain entities that have the potential to control large
positions, or portions thereof, in Treasury securities within a
reporting entity (e.g., hedge funds and insurance companies) are not
currently subject to federal requirements to make and preserve
securities-related records. To ensure that such entities make and
preserve records that document and facilitate the generation of
accurate large position reports--while minimizing the burden on these
entities--the Department proposes that all aggregating entities (within
their respective reporting entities) in this category make and maintain
records of original entry (the equivalent of blotters or journals).
These documents should be relatively easy for large, sophisticated
investors to implement. In fact, it is our understanding that most such
investors already produce and maintain such records as part of their
on-going business and accounting control systems.
Like the recordkeeping system applicable to entities that are
subject to federal securities-related recordkeeping rules, an
aggregating entity that is also a designated filing entity would be
required to make and maintain the following large position-related
records in addition to its records of original entry: copies of all of
the large position reports it filed, supporting documents or schedules
(e.g., worksheets) used to prepare large position reports, and a chart
showing the organizational entities (e.g., aggregating entities, if
applicable) whose data is aggregated in order to calculate a reportable
position. Such records would have to be preserved by the designated
filing entity for at least six years, the first two in an easily
accessible place.
5. Section 420.5
Effective Date. Section 420.5 sets out the effective date for both
the recordkeeping and reporting provisions of the large position rules.
The rule provides for a delayed effective date approximately six months
after publication of the final rule. This period of time is provided in
order to give affected entities sufficient time to make the necessary
preparations for compliance. Only subsection 420.4(a) is not subject to
this date but instead contains its own specific dates for compliance.
IV. Special Analysis
The proposed rules reflect the Treasury's interest in meeting
regulators' informational needs while minimizing the costs and burdens
on market participants. The rules propose to adopt an on-demand
reporting system, which will significantly minimize operational and
compliance costs for market participants compared with the costs that
would have been incurred if a regular reporting system were required.
Further, in an effort to avoid imposing new requirements, the proposed
regulations adopt, for the most part, existing federal recordkeeping
requirements for the largest segment of market participants that would
be subject to the rules. The proposal requires limited records to be
maintained by those entities that are not currently subject to federal
rules to make and preserve securities-related records. Additionally,
the establishment of a minimum floor of $2 billion for the large
position threshold will also greatly reduce the number of market
participants potentially subject to the proposed rules. Therefore,
based on the very limited impact of the proposal, it is the
Department's view that the proposed regulations are not a ``significant
regulatory action'' for the purposes of Executive Order 12866.
In addition, pursuant to the Regulatory Flexibility Act,\33\ it is
hereby certified that the proposed regulations, if adopted, will not
have a significant economic impact on a substantial number of small
entities since the proposal establishes a minimum large position
threshold of $2 billion. This assures market participants that the
Treasury would not request large position reports for positions below
that minimum amount. The Department does not believe that small
entities will control positions of $2 billion or greater in any
Treasury security. Accordingly, the inapplicability of the proposed
regulations to small firms indicates that there is no significant
impact. As a result, a regulatory flexibility analysis is not required.
\33\5 U.S.C. 601, et seq.
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The Paperwork Reduction Act of 1995 requires that collections of
information prescribed in the proposed rules be submitted to the Office
of Management and Budget for review and approval.\34\ In accordance
with this requirement, the Department has submitted the collection of
information contained in this notice of proposed rulemaking for review.
Under the Act, an agency may not conduct or sponsor, and a person is
not required to respond to, a collection of information unless it
displays a valid OMB control number. Comments on the collection of
information may be submitted to the Office of Information and
Regulatory Affairs, Office of Management and Budget, Attention: Desk
Officer for Department of the Treasury, Washington, D.C. 20503; and to
the Government Securities Regulations Staff, Bureau of the Public Debt,
at the address specified at the beginning of this document.
\34\44 U.S.C. 3507(d).
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The collection of information in this proposed regulation is
contained in proposed Secs. 420.3 and 420.4. The proposed reporting
requirements in Sec. 420.3 would require the designated filing entity
of any market participant, whose position equals or exceeds the
announced large position threshold for a specific issue of a Treasury
security, to report information to FRBNY. Although the Treasury cannot
be certain of the number of market participants that would have large
reportable positions for a specific issue on which information is
requested, we believe that very few entities would likely have to file
reports because the proposed minimum reporting threshold is $2 billion.
Further, Treasury expects that its requests for information will be
relatively infrequent, and estimates that there will only be an average
of five reports filed in response to any particular request.
The proposed recordkeeping requirements in Sec. 420.4 require any
aggregating entity to make and preserve certain records as of the
effective date, but only if it has, during a specified period,
controlled a portion of its reporting entity's reportable position in
any Treasury security when that reportable position is equal to or in
excess of the $2 billion minimum large position threshold specified in
Sec. 420.2(d). For each reporting entity subject to the recordkeeping
rules as of the effective date, the designated filing entity will be
required to submit a letter, on a one-time basis, certifying that it
has in place, or will have in place, a recordkeeping system capable of
making, verifying the accuracy of, and preserving the requisite
records. As mentioned above, while Treasury expects that very few
entities would likely control positions in excess of the stated
threshold that would require reporting, a larger group of entities will
[[Page 65226]]
be required to submit the one-time letter.
For aggregating entities currently subject to, and in compliance
with, recordkeeping rules of federal securities or federal bank
regulators, and subject to the large position recordkeeping rules,
there are no additional recordkeeping requirements, with one exception.
If the aggregating entity is the designated filing entity for its
reporting entity, then it is required to make and maintain copies of
any large position reports filed; supporting documents or schedules
used to compute data for such large position reports, including any
information received from aggregating entities within the reporting
entity; and an organizational chart showing the entities that are
aggregated in developing a reportable position.
Those aggregating entities that must comply with the proposed rules
but are not subject to paragraph 420.4(b) must make and preserve
journals, blotters or other records of original entry containing an
itemized record of all transactions that fall within the definition of
a reportable position. This provision accounts for the greatest
percentage of estimated recordkeeping burden hours. However, this
requirement is significantly less than the full range of books and
records requirements currently applicable to entities subject to
federal securities-related recordkeeping requirements. If the
aggregating entity is also a designated filing entity, the requirements
for a designated filing entity are also applicable.
The collection of information is intended to enable the Treasury
and other regulators to understand better the possible reasons for any
apparent significant price distortions and the possible causes of
market shortages in certain Treasury securities. The collection of
information will help ensure that the Treasury securities market
remains liquid and efficient, and is not viewed as subject to
manipulation. The proposed rules apply to all market participants
controlling large positions, as defined in the rules. Per paragraph
420.3(c), it is a mandatory requirement that reporting entities with
reportable positions that equal or exceed the specified threshold in a
Treasury notice respond through their designated filing entities by
filing a report in the required format and within the specified
reporting time frame.
In developing the proposed rules, we have consulted with affected
entities and regulatory agencies, and expect that this process will
continue through the development of a final rule. As previously
mentioned, Treasury published an ANPR\35\ which requested comments on a
number of specific issues, including the approach and structure for a
large position recordkeeping and reporting system. The estimated
reporting and recordkeeping burden hours are based on a review of
tenders submitted in Treasury auctions, position reports that primary
dealers already complete and voluntarily submit to FRBNY, recordkeeping
requirements that are already in place for federally-regulated
participants in the government securities market and discussions with
the industry and other regulators.
\35\See supra note 5.
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Treasury invites further comments on: (1) Whether the proposed
collection of information is necessary for the proper performance of
functions of the Treasury, including the practical utility of the
information; (2) the accuracy of the Treasury's estimate of the burden;
(3) enhancement of the quality, utility, and clarity of information to
be collected; and (4) minimizing the burden of the collection of
information on respondents, including through the use of automated
collection techniques or other forms of information technology.
Estimated total annual reporting and recordkeeping burden: 4,940
hours.
Estimated annual number of recordkeepers: 100.
Estimated annual number of respondents: 10.
Estimated annual frequency of response: On occasion.
List of Subjects
17 CFR Part 400
Administrative practice and procedure, Banks, banking, Brokers,
Government securities, Reporting and recordkeeping requirements.
17 CFR Part 420
Foreign investments in U.S., Government securities, Investments,
Reporting and recordkeeping requirements.
For the reasons set out in the preamble, 17 CFR Chapter IV,
subchapter A is proposed to be amended as follows:
PART 400--RULES OF GENERAL APPLICATION
1. The authority citation for part 400 is revised to read as
follows:
Authority: 15 U.S.C. 78o-5.
2. In Sec. 400.1, paragraph (e) is added as follows:
Sec. 400.1 Scope of regulations.
* * * * *
(e) Section 104 of the Government Securities Act Amendments of 1993
(Pub. L. 103-202, 107 Stat. 2344) amended Section 15C of the Act (15
U.S.C. 78o-5) by adding a new subsection (f), authorizing the Secretary
of the Treasury to adopt rules to require specified persons holding,
maintaining or controlling a large position in to-be-issued or
recently-issued Treasury securities to report such a position and make
and keep records related to such a position. Part 420 of this
subchapter contains the rules governing large position reporting.
* * * * *
3. Part 420 is added to read as follows:
PART 420--LARGE POSITION REPORTING
Sec.
420.1 Applicability.
420.2 Definitions.
420.3 Reporting.
420.4 Recordkeeping.
420.5 Effective Date.
Appendix A to Part 420--Separate Reporting Entity
Appendix B to Part 420--Sample Large Position Report
Authority: 15 U.S.C. 78o-5(f).
Sec. 420.1 Applicability.
(a) This part, including the Appendices, is applicable to all
persons that participate in the government securities market,
including, but not limited to, government securities brokers and
dealers, depository institutions, registered investment companies,
registered investment advisers, pension funds, hedge funds and
insurance companies, that may control a reportable position in a
recently-issued Treasury bill, note or bond as those terms are defined
in Sec. 420.2.
(b) Notwithstanding paragraph (a) of this section, foreign central
banks, foreign governments and international monetary authorities are
exempt from this part for the portion of any reportable position they
control that is held at the Federal Reserve Bank of New York.
(c) Notwithstanding paragraph (a) of this section, Federal Reserve
Banks are exempt from this part for the portion of any reportable
position they control for their own account.
(d) Notwithstanding the definition of recently-issued, the
Department reserves the right to collect large position information on
Treasury security issues that are older than those specified, provided
that such action is consistent
[[Page 65227]]
with the purposes of the Act (15 U.S.C 78o-5(f)).
Sec. 420.2 Definitions.
For the purposes of this part:
(a) ``Aggregating entity'' means a single entity (e.g., a parent
company or affiliate) that is combined with other entities, as
specified in paragraph (i) of this section, to form a reporting entity.
In those cases where an entity has no affiliates, the aggregating
entity is the same as the reporting entity.
(b) ``Control'' means having the authority to exercise investment
discretion over the purchase, sale, retention or financing of specific
Treasury securities. Only one entity should be considered to have
investment discretion over a particular position.
(c) ``Gross financing position'' is the sum of the gross par
amounts of a security issue received from financing transactions,
including, but not limited to, reverse repurchase transactions, bonds
borrowed, securities received in pledge, and collateralized credit
extended. In calculating the gross financing position, a reporting
entity may not net its positions against repurchase transactions,
securities loaned, securities pledged or other deliveries of the
security issue. However, a reporting entity may elect to reduce its
gross financing position by the par amount of the security received in
transactions: in which the counterparty retains the right to substitute
securities; that are subject to third party custodial relationships; or
that are hold-in-custody reverse repurchase agreements.
(d) ``Large position threshold'' means, with respect to a
reportable position, the dollar par amount such position must equal or
exceed in order for a reporting entity to be required to submit a large
position report. The large position threshold will be announced by the
Department and may vary with each notice of request to report large
position information and with each specified Treasury security.
However, under no circumstances will a large position threshold be less
than $2 billion.
(e) ``Net fails position'' is the net par amount of ``fails to
receive'' less ``fails to deliver'' in the same security. The net fails
position, as reported, may not be less than zero.
(f) ``Net trading position'' is the net sum of the following
respective positions in the specific security issue:
(1) Cash/immediate net settled positions;
(2) Net when-issued positions;
(3) Net forward positions, including next-day settling;
(4) Net futures contract positions that require delivery of the
specific security; and
(5) Net holdings of STRIPS principal components of the security.
(g) ``Recently-issued'' means:
(1) With respect to Treasury securities that are issued quarterly
or more frequently, the three most recent issues of the security (e.g.,
in early April, the January, February, and March 2-year notes).
(2) With respect to Treasury securities that are issued less
frequently than quarterly, the two most recent issues of the security.
(3) With respect to a reopened security, the entire issue of a
reopened security (older and newer portions) based on the date the
reopened security is reissued by the Department (or scheduled to be
reissued for when-issued securities).
(4) For all Treasury securities, a security announced to be issued
or auctioned but unissued (when-issued), starting from the date of the
issuance announcement. The most recent issue of the security is the one
most recently announced.
(h) ``Reportable position'' is the sum of the net trading
positions, gross financing positions and net fails positions in a
specified issue of Treasury securities collectively controlled by a
reporting entity.
(i) ``Reporting entity'' means any corporation, partnership, person
or other entity and its affiliates. For the purposes of this
definition, an affiliate is any: entity that is more than 50% owned,
directly or indirectly, by the aggregating entity or by any other
affiliate of the aggregating entity; person or entity that owns,
directly or indirectly, more than 50% of the aggregating entity; person
or entity that owns, directly or indirectly, more than 50% of any other
affiliate of the aggregating entity; or entity, a majority of whose
board of directors or a majority of whose general partners are
directors or officers of the aggregating entity or any affiliate of the
aggregating entity.
(1) Subject to the conditions prescribed in Appendix A, one or more
aggregating entities, either separately or together with one or more
other aggregating entities, may be recognized as a separate reporting
entity. Any entity that previously has received recognition from the
Treasury as a separate bidder in Treasury auctions pursuant to Appendix
A of 31 CFR Part 356 is also recognized as a separate reporting entity
without further action.
(2) Notwithstanding this definition, any persons or entities that
intentionally act together with respect to the investing in, retention
of, or financing of, Treasury securities are considered, collectively,
to be one reporting entity.
Sec. 420.3 Reporting.
(a) A reporting entity is subject to the reporting requirements of
this section only when its reportable position equals or exceeds the
large position threshold specified by the Department for a specific
Treasury security issue. The Department shall provide notice of such
threshold by issuance of a press release and subsequent publication of
the notice in the Federal Register. Such notice will identify the
Treasury security issue to be reported; the date or dates (as of close
of business) for which the large position information must be reported;
and the applicable large position threshold for that issue. It is the
responsibility of a reporting entity to take reasonable actions to be
aware of such a notice.
(b) A reporting entity shall select one entity from among its
aggregating entities (i.e., the designated filing entity) as the entity
designated to compile and file a report on behalf of the reporting
entity. The designated filing entity shall be responsible for filing
any large position reports in response to a notice issued by the
Department and for maintaining the additional records prescribed in the
applicable paragraph of Sec. 420.4.
(c) (1) In response to a notice issued under paragraph (a) of this
section requesting large position information, a reporting entity with
a reportable position that equals or exceeds the specified large
position threshold stated in the notice shall compile and report the
amounts of the reporting entity's reportable position, as follows:
(i) net trading position comprising:
(A) cash/immediate net settled positions,
(B) net when-issued positions,
(C) net forward positions, including next-day settling,
(D) net futures contracts that require delivery of the specific
security, and
(E) net holdings of STRIPS principal components of the security;
(ii) gross financing position; and
(iii) net fails position.
(2) The large position report should include the following two
additional items as memoranda:
(i) A total that includes the amounts of securities delivered
through repurchase agreements, securities loaned, securities pledged,
and collateralized loans and other securities deliveries. This total
should not be reflected in the gross financing position; and
(ii) If the reporting entity has elected to exercise the option
available in
[[Page 65228]]
Sec. 420.2(c) to reduce the amount of the gross financing position by
the par amount of securities received but over which the reporting
entity did not have effective control, the amount not included. The
total amount of reduction should be deducted from the gross financing
position prior to determining the reportable position.
(3) An illustration of a sample report is contained in Appendix B.
Each of the net trading position elements shall be netted and reported
as the applicable positive or negative number (or zero). The gross
financing position and net fails position should each be reported as a
single entry. If the amount of the net fails position is zero or less,
report zero. All of these items should be reported in the order
specified above. All position amounts and their components should be
reported at par in millions of dollars.
(4) All balances must be reported as of the close of business of
the reporting date(s) specified in the notice.
(5) Each submitted report must include the following administrative
information in addition to the reportable position: the name of the
reporting entity, the address of the principal place of business, the
name and address of the designated filing entity, the Treasury security
that is being reported, the CUSIP number, the report date or dates for
which information is being reported, the date the report was submitted,
the name and telephone number of the person to contact regarding
information reported, and the name and position of the authorized
individual submitting this report. The report must also be signed by
the authorized individual, who must be one of the following: the chief
financial officer, the chief operating officer, the chief executive
officer, or the managing partner or equivalent of the designated filing
entity. The designated filing entity must also include in its report,
immediately preceding the signature, a statement of certification as
follows:
The reporting entity submitting this report and the person(s) by
whom it is executed hereby certify that all information contained in
the report is accurate and complete and that the reporting entity is
in compliance with the requirements of 17 CFR Part 420.
(6) The report must be filed before noon Eastern time on the second
business day following issuance of the press release.
(d) A report to be filed pursuant to paragraph (c) will be
considered filed when received by the Federal Reserve Bank of New York.
The report may be filed in any manner acceptable to the Federal Reserve
Bank of New York.
(e) A reporting entity that has filed a report pursuant to
paragraph (c) shall, at the request of the Department or the Federal
Reserve Bank of New York, timely provide any supplemental information
pertaining to such report.
Sec. 420.4 Recordkeeping.
(a)(1) Notwithstanding the provisions of paragraphs (b) and (c) of
this section, an aggregating entity must make and maintain records
pursuant to this part as of its effective date, but only if the
aggregating entity has controlled a portion of its reporting entity's
reportable position in any Treasury security when such reportable
position of the reporting entity has equaled or exceeded the minimum
large position threshold specified in Sec. 420.2(d) (i.e., $2 billion)
during the prior two-year period ending [90 days after publication of
the final rule]. Subsequent to the effective date, an aggregating
entity that controls a portion of its reporting entity's reportable
position in a recently-issued Treasury security, when such reportable
position of the reporting entity equals or exceeds the minimum large
position threshold, shall be responsible for making and maintaining the
records prescribed in this part.
(2) In the case of a reporting entity whose reportable position in
any Treasury security has equaled or exceeded the minimum large
position threshold during the prior two-year period ending [90 days
after publication of the final rule], each such reporting entity's
designated filing entity shall submit a letter to the Federal Reserve
Bank of New York certifying that it has in place, or will have in place
by the effective date, a recordkeeping system (including policies and
procedures) capable of making, verifying the accuracy of, and
preserving the records required pursuant to this section.
(3) The letter specified in paragraph (a)(2) of this section must
be signed by one of the following: the chief financial officer, the
chief operating officer, the chief executive officer, or the managing
partner or equivalent of the designated filing entity and must be
received by the Federal Reserve Bank of New York no later than [120
days after publication of the final rule].
(b) Records to be made and preserved by entities that are subject
to the recordkeeping provisions of the Commission, the Department, or
the appropriate regulatory agencies for financial institutions. As an
aggregating entity, compliance by a registered broker or dealer,
registered government securities broker or dealer, noticed financial
institution, depository institution that exercises investment
discretion, registered investment advisor, or registered investment
company with the applicable recordkeeping provisions of the Commission,
the Department, or the appropriate regulatory agencies for financial
institutions shall constitute compliance with this section, provided
that if such entity is also the designated filing entity it:
(1) Makes and keeps copies of all large position reports filed
pursuant to this part;
(2) Makes and keeps supporting documents or schedules used to
compute data for the large position reports filed pursuant to this
part;
(3) Makes and keeps a chart showing the organizational entities
that are aggregated (if applicable) in determining a reportable
position; and
(4) With respect to recordkeeping preservation requirements that
contain more than one retention period, preserves records required by
paragraphs (b)(1)-(3) of this section for the longest record retention
period of applicable recordkeeping provisions.
(c) Records to be made and kept by other entities. (1) An
aggregating entity that is not subject to the provisions of paragraph
(b) of this section shall make and preserve a journal, blotter, or
other record of original entry containing an itemized record of all
transactions that fall within the definition of a reportable position,
including information showing the account for which such transactions
were effected and the following information pertaining to the
identification of each instrument: the type of security, the par
amount, the CUSIP number, the trade date, the maturity date, the type
of transaction (e.g., a reverse repurchase agreement), and the name or
other designation of the person from whom sold or purchased.
(2) If such aggregating entity is also the designated filing
entity, then in addition it shall make and preserve the following
records:
(i) copies of all large position reports filed pursuant to this
part;
(ii) supporting documents or schedules used to compute data for the
large position reports filed pursuant to this part; and
(iii) a chart showing the organizational entities that are
aggregated (if applicable) in determining a reportable position.
(3) With respect to the records required by paragraphs (c) (1) and
(2) of this section, each such aggregating entity shall preserve such
records for a period of not less than six years, the first two years in
an easily accessible place. If an aggregating entity maintains its
records at a location other than its principal place of business, the
aggregating entity must maintain an
[[Page 65229]]
index that states the location of the records, and such index must be
easily accessible at all times.
Sec. 420.5 Effective Date.
The provisions of this part, except for Sec. 420.4(a), shall be
first effective on [180 days from the date of publication of the final
rule. If the date does not fall on the last day of the month, then move
the date to the end of the month.].
Appendix A to Part 420--Separate Reporting Entity
Subject to the following conditions, one or more aggregating
entity(ies) (e.g., parent or subsidiary) in a reporting entity,
either separately or together with one or more other aggregating
entity(ies), may be recognized as a separate reporting entity. All
of the following conditions must be met for such entity(ies) to
qualify for recognition as a separate reporting entity:
(1) Such entity(ies) must be prohibited by law or regulation
from exchanging, or must have established written internal
procedures (i.e., Chinese walls) designed to prevent the exchange of
information related to transactions in Treasury securities with any
other aggregating entity;
(2) Such entity(ies) must not be created for the purpose of
circumventing these large position reporting rules;
(3) Decisions related to the purchase, sale or retention of
Treasury securities must be made by employees of such entity(ies).
Employees of such entity(ies) who make decisions to purchase or
dispose of Treasury securities must not perform the same function
for other aggregating entities; and
(4) The records of such entity(ies) related to the ownership,
financing, purchase and sale of Treasury securities must be
maintained by such entity(ies). Those records must be identifiable--
separate and apart from similar records for other aggregating
entities.
To obtain recognition as a separate reporting entity, each
aggregating entity or group of aggregating entities must request
such recognition from the Department pursuant to the procedures
outlined in Sec. 400.2(c) of this title. Such request must provide a
description of the entity or group and its position within the
reporting entity, and provide the following certification:
``[Name of the entity(ies)] hereby certifies that to the best of
its knowledge and belief it meets the conditions for a separate
reporting entity as described in Appendix A to 17 CFR part 420. The
above named entity also certifies that it has established written
policies or procedures, including ongoing compliance monitoring
processes, that are designed to prevent the entity or group of
entities from:
``(1) Exchanging any of the following information with any other
aggregating entity (a) positions that it holds or plans to acquire
in a Treasury security; (b) investment strategies that it plans to
follow regarding Treasury securities; and (c) financing strategies
that it plans to follow regarding Treasury securities, or
``(2) In any way intentionally acting together with any other
aggregating entity with respect to the purchase, sale, retention or
financing of Treasury securities.
``The above-named entity agrees that it will promptly notify the
Department in writing when any of the information provided to obtain
separate reporting entity status changes or when this certification
is no longer valid.''
Any entity that previously has received recognition as a
separate bidder in Treasury auctions from the Department pursuant to
31 CFR Part 356 is also recognized as a separate reporting entity
without further action.
Appendix B to Part 420--Sample Large Position Report.
Formula for Determining a Reportable Position
[$ Amounts in millions at par value]
Date For Which Information Is Being Reported: ______
1. Cash/Immediate Net Settled Positions...................... $____
2. Net When-Issued Positions for To-Be-Issued and Reopened
Issues...................................................... +$____
3. Net Forward Settling Positions Including Next Day Settling +$____
4. Net Positions in Futures Contracts Requiring Delivery of
the Specific Security....................................... +$____
5. Net STRIPS Principal Components of the Specific Security.. +$____
6. Gross Financing Position (Includes total of securities
received through reverse repos, bonds borrowed, securities
received in pledge, collateralized credit extended.)........ +$____
7. Net Fails Position (Fails to Receive less Fails to
Deliver. If equal to or less than 0, report 0.)............. +$____
8. Total Reportable Position................................. =$____
Memorandum #1: Report one total which includes the gross par
amounts of securities delivered through repurchase
agreements, securities loaned, securities pledged, and
collateralized loans. Not included in item #6 (Gross
Financing Position) as reported above....................... $____
Memorandum #2: If the optional exclusion was taken to reduce
the amount of the Gross Financing Position by the amount of
securities received but that the reporting entity did not
have effective control over (e.g., third party custodial
structures, hold-in-custody relationships, counterparty
retained contractual right to substitute), indicate the
total amount of reduction here. Deduct from item #6 (Gross
Financing Position)......................................... $____
Administrative Information To Be Provided in the Report
Name of Reporting Entity:
Address of Principal Place of Business:
Name and Address of the Designated Filing Entity:
Treasury Security Reported on:
CUSIP Number:
Date or Dates for Which Information Is Being Reported:
Date Report Submitted:
Name and Telephone Number of Person to Contact Regarding
Information Reported:
Name and Position of Authorized Individual Submitting this
Report (Chief Financial Officer, Chief Operating Officer, Chief
Executive Officer, or Managing Partner or Equivalent of Designated
Filing Entity):
Statement of Certification: ``The reporting entity submitting
this report and the person(s) by whom it is executed hereby certify
that all information contained in the report is accurate and
complete and that the reporting entity is in compliance with the
requirements of 17 CFR Part 420.''
Signature of Authorized Person Named Above:
* * * * *
Date:
Darcy Bradbury,
Deputy Assistant Secretary (Federal Finance).
[FR Doc. 95-30766 Filed 12-14-95; 1:59 pm]
BILLING CODE 4810-39-W
