[Federal Register Volume 64, Number 150 (Thursday, August 5, 1999)]
[Proposed Rules]
[Pages 42626-42629]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-19957]
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DEPARTMENT OF THE TREASURY
Fiscal Service
31 CFR Part 375
Marketable Treasury Securities Redemption Operations
AGENCY: Bureau of the Public Debt, Fiscal Service, Department of the
Treasury.
ACTION: Proposed rule.
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SUMMARY: The Department of the Treasury (``Treasury'', ``We'', or
``Us'') is publishing for comment proposed rules setting out the terms
and conditions by which we may redeem outstanding, unmatured marketable
Treasury securities. While we have not decided to conduct redemption
operations, we are publishing this proposed rule to obtain comments on
the mechanism by which we might conduct such operations. By
establishing the mechanism in advance, we would be able to conduct
redemption operations in a more timely and efficient way should such a
decision be made.
We would establish a new part in the Code of Federal Regulations
for this purpose. The proposed rules describe a process by which an
entity may submit competitive offers to sell us securities. The
proposed rules also describe how we would announce the redemption
operation results and the requirements for delivering securities to us
and receiving payment.
Redemption operations would help us better manage our financing
needs, promote more efficient capital markets, and may lower financing
costs for taxpayers.
DATES: Submit comments on or before October 4, 1999.
ADDRESSES: You may send us hardcopy comments at: Government Securities
Regulations Staff, Bureau of the Public Debt, 999 E Street NW., Room
315, Washington, DC 20239-0001. You may also send us comments by e-mail
at govsecreg@bpd.treas.gov. When sending comments by e-mail, please use
an ASCII file format and provide your full name and mailing address.
Comments received will be available for public inspection and
downloading from the Internet and for public inspection and copying at
the Treasury Department Library, FOIA Collection, Room 5030, Main
Treasury Building, 1500 Pennsylvania Avenue, NW., Washington, DC 20220.
To visit the library, call (202) 622-0990 for an appointment.
This proposed amendment is also available for downloading from
Public Debt's web site at the following address:
www.publicdebt.treas.gov.
FOR FURTHER INFORMATION CONTACT: Lori Santamorena (Acting Executive
Director) or Chuck Andreatta (Senior Financial Advisor), Bureau of the
Public Debt, Government Securities Regulations Staff, (202) 691-3632.
SUPPLEMENTARY INFORMATION:
I. Background
The government's improved fiscal position has caused Treasury's
borrowing needs to decline significantly, and we have been adjusting
the government's borrowing program accordingly. Our adjustments to date
have distributed the required cuts in borrowing across various
maturities and sectors of the federal debt. In this environment, we
began examining the concept of purchasing outstanding Treasury
securities in the market. No decisions have been made to use a debt
buy-back program, but having the infrastructure available to be able to
use this tool would provide Treasury additional flexibility.
Debt buy-backs could provide us with greater flexibility to manage
the government's debt and to respond to our improved fiscal condition.
First, buy-backs could enhance market liquidity by allowing us to
maintain regular issuance of new benchmark securities across the
maturity spectrum, in greater volume than otherwise. Over the long
term, this enhanced liquidity could reduce the government's interest
expense and promote more efficient capital markets.
Second, buy-backs could enhance our ability to exert control over
the maturity structure of the debt. Without a debt buy-back program,
further reductions in Treasury new issue sizes and frequencies could be
necessary. A buy-back program, however, would provide us the option of
managing the maturity structure of the debt by selectively targeting
the maturities of debt to be repurchased.
Third, buy-backs could be used as a cash management tool, absorbing
excess cash in periods such as late April when tax revenues greatly
exceed immediate spending needs.
In addition, although not a primary reason for conducting buy-
backs, we may occasionally be able to reduce the government's interest
expense by purchasing ``off-the-run'' debt and replacing it with lower-
yield ``on-the-run'' debt.;1
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\1\ A Treasury security is ``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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II. Analysis
In a buy-back operation (a ``redemption operation'' in the proposed
rule), we would redeem securities by purchasing them from current
owners. The most equitable method for determining redemption prices is
through a process in which market participants submit competitive
offers to sell particular Treasury securities to the Treasury. We
welcome comments about this proposed methodology.
Under the proposal, we would announce our intention to purchase
specified Treasury securities, including the approximate total amount
that we want to buy, and the deadlines for offers and settlement. We
would accept offers on a multiple-price basis--that is, we would
determine and accept the most attractive offers and each successful
offeror would receive the price at which it offered securities. We
could decide to buy back less than the announced amount if market
conditions warranted.
For the reasons set forth below, we propose that the entities that
have a trading relationship with the Federal Reserve Bank of New York
(primary dealers) be eligible to submit offers. Other entities could
submit offers through the primary dealers or an intermediary that has a
relationship with a primary dealer.
Restricting direct offers to primary dealers would permit us to use
the
[[Page 42627]]
Federal Reserve Bank of New York's existing electronic systems for
executing open market transactions and facilitate transfers of
securities to Treasury at settlement. No customer lists would be
required under these proposed rules.
Redemption operation announcements would be in the form of an
official Treasury press release, supplemented by a posting on the
Bureau of the Public Debt's website (www.publicdebt.treas.gov) and on-
line broadcast messages over the Federal Reserve's Fedline OM (Open
Market) system. The Treasury securities eligible for redemption and the
privately held amount of each security would be included in the
redemption operation announcement.
To expedite tender processing and calculation and announcement of
redemption operation results, we would accept competitive offers only.
Price-based offers would be most convenient for redemption operation
participants since the eligible securities already would be trading in
the secondary market on a price basis.
The price format would be consistent with that already used by the
Federal Reserve's open market operations. See Sec. 375.13(b). The only
limitation on the dollar amount of offers is that the total amount of
offers from a submitter for any particular security could not exceed
the total outstanding privately held amount of that security.
Calculation of redemption operation results would occur at the
Federal Reserve Bank of New York, acting as Treasury's fiscal agent,
using a methodology determined by Treasury. There would be no
limitation on the number of offers for each security. We also would not
limit the aggregate amount of offers for securities that Treasury would
accept from any one submitter.2
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\2\ In other words, there is no limitation similar to the ``35-
percent limit'' on awards in the auction process. See 31 CFR
356.22(b).
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It is possible that, in a particular redemption operation, the
calculations could result in our redeeming only one security. We also
would not set any limits on the amount or percentage of the outstanding
amount of a security that could be redeemed. It is possible, therefore,
that following a redemption operation or redemption operations, the
privately held amount still outstanding of a particular security could
be very small.
Once the redemption operation calculations have been completed,
Treasury would announce the results through an official press release,
including a listing of the amount of each security we accept for
redemption. We would also post the results to Public Debt's website and
other on-line broadcast messages. The Federal Reserve Bank of New York
would transmit results messages to the submitters who participated in
the redemption operation. A results message would inform a submitter
only of the acceptance or rejection of the offers it submitted.
Submitters would in turn notify customers of successful offers in the
redemption operation.
Settlement would occur on the business day after the deadline for
submission of offers (tenders). Successful submitters would transfer
the securities they submitted offers for in the redemption operation to
Treasury, via the Federal Reserve Bank of New York. This next-day
delivery requirement follows current market convention for other
Treasury securities transactions. The settlement amount would include
any accrued interest payable by Treasury through the settlement date.
We request specific comment on this proposed requirement or any other
settlement-related issues.
The securities delivered may be in either book-entry (electronic)
or definitive (paper) form. Those delivering book-entry securities
would transfer via Fedwire the correct par amount of securities against
payment for the correct settlement amount to the account specified on
the redemption operation announcement. A submitter planning to deliver
definitive securities would be required to contact the Federal Reserve
Bank of New York within two hours of the announcement of the redemption
operation results and make arrangements for delivery.
We encourage comments on any aspect of this proposed rule to ensure
that we address the concerns of market participants and Treasury. In
addition, this proposed rule has been drafted using plain language. We
specifically request comment on the clarity of this rule and how we can
make it easier to understand.
III. Procedural Requirements
This proposed rule is not a ``significant regulatory action'' under
Executive Order 12866. Although we are issuing this proposed rule in
proposed form to benefit from public comment, the notice and public
procedures requirements of the Administrative Procedure Act do not
apply, under 5 U.S.C. 553(a)(2).
Since no notice of proposed rulemaking is required, the provisions
of the Regulatory Flexibility Act (5 U.S.C. 601 et seq.) do not apply.
List of Subjects in 31 CFR Part 375
Bonds, Federal Reserve System, Government securities, Securities.
For the reasons stated in the preamble, the Treasury proposes to
amend 31 CFR chapter II, subchapter B, by adding new part 375 to read
as follows:
PART 375--MARKETABLE TREASURY SECURITIES REDEMPTION OPERATIONS
Subpart A--General Information
Sec.
375.0 What authority does the Treasury have to redeem its
securities?
375.1 Where are the rules for the redemption operation located?
375.2 What special definitions apply to this rule?
375.3 What is the role of the Federal Reserve Bank of New York in
this process?
Subpart B--Offering, Certifications, and Delivery
375.10 What is the purpose of the redemption operation
announcement?
375.11 Who may participate in a redemption operation?
375.12 How do I submit an offer?
375.13 What requirements apply to offers?
375.14 Do I have to make any certifications?
375.15 Who is responsible for delivering securities?
Subpart C--Determination of Redemption Operation Results; Settlement
375.20 When will the Treasury decide on which offers to accept?
375.21 When and how will the Treasury announce the redemption
operation results?
375.22 Will I receive any additional information and, if I am
submitting offers for others, do I have to provide confirmations?
375.23 How does the securities delivery process work?
Subpart D--Miscellaneous Provisions
375.30 Does the Treasury have any discretion in this process?
375.31 What could happen if someone does not fully comply with the
redemption operation rules or fails to deliver securities?
Authority: 5 U.S.C. 301; 31 U.S.C. 3111; 12 U.S.C. 391.
Subpart A--General Information
Sec. 375.0 What authority does the Treasury have to redeem its
securities?
Section 3111 of Title 31 of the United States Code authorizes the
Secretary of the Treasury to use money received from the sale of an
obligation and other money in the general fund of the Treasury to buy,
redeem, or refund, at or before maturity, outstanding bonds, notes,
certificates of indebtedness, Treasury bills, or savings certificates
of
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the United States Government. For the purposes of this part, we will
refer to these outstanding obligations as ``securities.''
Sec. 375.1 Where are the rules for the redemption operation located?
The provisions in this part and the redemption operation
announcement govern the redemption of marketable Treasury securities
under 31 U.S.C. 3111. (See Sec. 375.10.)
Sec. 375.2 What special definitions apply to this rule?
The definitions in 31 CFR part 356 govern this part except as
follows:
Accrued interest means an amount payable by the Treasury as part of
the settlement amount for the interest income earned between the last
interest payment date and the settlement date.
Bank means the Federal Reserve Bank of New York.
Customer means a person or entity on whose behalf a submitter has
been directed to submit an offer of a specified amount of securities in
a specific redemption operation.
Definitive security means a security that is issued and maintained
as a certificate. Definitive securities are in either registered or
bearer form.
Minimum offer amount means the smallest par amount of a security
that may be offered to the Treasury. We will state the minimum offer
amount in the redemption operation announcement.
Multiple means the smallest additional par amount of a security
that may be offered to the Treasury. We will state the multiple in the
redemption operation announcement.
Offer means an offer to deliver for redemption a stated par amount
of a specific security to the Treasury at a stated price.
Price means the price of a security as offered by a submitter or
its customer and excludes accrued interest.
Privately held amount means the total amount outstanding of a
security eligible for redemption less holdings of the Federal Reserve
System and Federal Government accounts.
Redemption amount means the maximum par amount of securities that
we are planning to redeem through a redemption operation. We will state
the redemption amount in the redemption operation announcement.
Redemption operation means a competitive process by which the
Treasury accepts offers of marketable Treasury securities that by their
terms are not immediately payable.
Security means an outstanding unmatured obligation of the United
States Government that the Secretary is authorized to buy, redeem or
refund under section 3111 of Title 31 of the United States Code.
Settlement means full and complete delivery of and payment for
securities redeemed.
Settlement amount means the par amount of each security that we
redeem, multiplied by the price we accept in a redemption operation,
plus any accrued interest.
Settlement date means the date specified in the redemption
operation announcement on which you must deliver a security to the
Treasury for payment.
Submitter means an entity submitting offers directly to the
Treasury for its own account, for the account of others, or both. (See
Sec. 375.11(a).)
Tender means a computer transmission or document submitted in a
redemption operation that contains one or more offers.
We (``us'') means the Secretary of the Treasury and his or her
delegates, including the Treasury Department, Bureau of the Public
Debt, and their representatives. The term also includes the Federal
Reserve Bank of New York, acting as fiscal agent of the United States.
You means a prospective submitter in a redemption operation.
Sec. 375.3 What is the role of the Federal Reserve Bank of New York in
this process?
As fiscal agent of the United States, the Federal Reserve Bank of
New York performs various activities necessary to conduct a redemption
operation under this part. These activities include but are not limited
to:
(a) Accepting and reviewing tenders;
(b) Calculating redemption operation results;
(c) Issuing notices of redemptions;
(d) Accepting deliveries of Treasury securities at settlement; and
(e) Processing the Treasury payment for securities delivered at
settlement.
Subpart B--Offering, Certifications, and Delivery
Sec. 375.10 What is the purpose of the redemption operation
announcement?
We provide public notice that we are redeeming Treasury securities
by issuing a redemption operation announcement. This announcement lists
the details of each proposed redemption operation, including the total
redemption amount, the eligible securities, the total privately held
amount of each eligible security, and the redemption operation and
settlement dates. The redemption operation announcement and this part
specify the terms and conditions of a redemption operation. If anything
in the redemption operation announcement differs from anything in this
part, the redemption operation announcement will apply. Accordingly,
you should read the applicable redemption operation announcement along
with this part.
Sec. 375.11 Who may participate in a redemption operation?
(a) Submitters. To be a submitter, you must be an institution that
the Federal Reserve Bank of New York has approved to conduct open
market transactions with the Bank.
(b) Others. A person or entity other than a submitter may
participate only if it arranges to have an offer or offers submitted on
its behalf by a submitter.
Sec. 375.12 How do I submit an offer?
As a submitter, you must submit an offer in a tender to the
Treasury via the Federal Reserve Bank of New York through its Trading
Room Automated Processing System (TRAPS). You must submit any tenders
in an approved format and the Bank must receive them prior to the
closing time in the redemption operation announcement. If we do not
receive your tenders timely, we will reject them. Tenders are binding
on their submitter after the closing time specified in the redemption
operation announcement. You are responsible for ensuring that the
Federal Reserve Bank of New York receives your tenders on time. We will
not be responsible in any way for any unauthorized tender submissions
or for any delays, errors, or omissions in submitting tenders.
Sec. 375.13 What requirements apply to offers?
(a) General. You may only submit competitive offers (specifying a
price). All offers must state the CUSIP number or security description,
par amount, and price of each security offered. All offers must equal
or exceed the minimum offer amount, and be in the multiple, stated in
the redemption operation announcement.
(b) Price format. You must express offered prices in terms of price
per $100 of par with three decimals, e.g., 102.172. The first two
decimals represent fractional 32nds of a dollar. The third decimal
represents eighths of a 32nd of a dollar, and must be a 0, 2, 4, or 6.
For example, an offer of 102.172 means one hundred two and seventeen
32nds and two eighths of a 32nd, or in decimals, 102.5390625.
(c) Maximum amount offered. The total amount of your offers for any
individual security may not exceed the total privately held amount of
the
[[Page 42629]]
security. If it does, we will recognize only your lowest-priced offer,
through successively higher-priced offers, until we reach the total
privately held amount. A list of the privately held amount of each
eligible security will appear in the redemption operation announcement.
(d) Maximum number of offers. There is no limit on the number of
offers you may make of each eligible security. There is also no limit
on the number of eligible securities you may offer.
Sec. 375.14 Do I have to make any certifications?
By submitting a tender offering a security or securities for sale,
you certify that you are in compliance with this part and the
redemption operation announcement.
Sec. 375.15 Who is responsible for delivering securities?
As a submitter, you are responsible for delivering any securities
we accept in the redemption operation. (See Sec. 375.23.) All
securities you deliver must be free and clear of all liens, charges,
claims, and any other restrictions.
Subpart C--Determination of Redemption Operation Results;
Settlement
Sec. 375.20 When will the Treasury decide on which offers to accept?
We will determine which offers or portions of offers to accept
after the closing time for receipt of tenders. All such determinations
will be final.
Sec. 375.21 When and how will the Treasury announce the redemption
operation results?
We will make an official announcement of the redemption operation
results through a press release. For each security we redeem, the press
release will include such information as the amounts offered and
accepted, the highest price accepted, and the remaining privately held
amount outstanding.
Sec. 375.22 Will I receive any additional information and, if I am
submitting offers for others, do I have to provide confirmations?
(a) Confirmations to submitters. We will provide a confirmation of
acceptance or rejection in the form of a results message to submitters
of offers by the close of the business day of the redemption operation.
(b) Confirmation of customer offers. If you submit a successful
offer for a customer, you are responsible for notifying that customer
of the impending redemption.
Sec. 375.23 How does the securities delivery process work?
(a) Deliveries of book-entry securities. If any of the offers you
submitted are accepted and you are delivering book-entry securities,
you must transfer them in the correct par amount against the correct
settlement amount on the settlement date. You must deliver the
securities to the account specified in the redemption operation
announcement.
(b) Deliveries of definitive securities. If any of the offers you
submitted are accepted and you are delivering definitive securities,
you must notify the Federal Reserve Bank of New York within two hours
of the announcement of the redemption operation results. You must
deliver them in the correct par amount on the settlement date.
Registered securities must be properly assigned. Unless otherwise
specified in the offering announcement, bearer securities must have all
of their unmatured coupons attached. Deliver them to us at the address
for the Federal Reserve Bank of New York provided in the redemption
operation announcement. On the day the Bank receives them, it will
credit the settlement amount to the depository institution's funds
account you specified when you notified the Bank of your intention to
deliver definitive securities.
Subpart D--Miscellaneous Provisions
Sec. 375.30 Does the Treasury have any discretion in this process?
(a) We have the discretion to:
(1) Accept or reject any offers or tenders submitted in a
redemption operation;
(2) Redeem less than the amount of securities specified in the
redemption operation announcement;
(3) Add to, change, or waive any provision of this part; or
(4) Change the terms and conditions of a redemption operation.
(b) Our decisions under this part are final. We will provide a
public notice if we change any redemption operation provisions, terms
or conditions.
Sec. 375.31 What could happen if someone does not fully comply with
the redemption operation rules or fails to deliver securities?
(a) General. If a person or entity fails to comply with any of the
redemption operation rules in this part, we will consider the
circumstances and take appropriate action. This could include barring
the person or entity from participating in future redemption operations
under this part and future auctions under 31 CFR part 356. We also may
refer the matter to an appropriate regulatory agency.
(b) Liquidated damages. If you fail to deliver securities on time,
we may require you to pay liquidated damages of up to 1% of your
settlement amount.
Dated: July 29, 1999.
Donald V. Hammond,
Fiscal Assistant Secretary.
[FR Doc. 99-19957 Filed 8-4-99; 8:45 am]
BILLING CODE 4810-39-P
