Federal Register: Part II [31 CFR Part 356]

DEPARTMENT OF THE TREASURY

CFR Citation: 31 CFR Part 356

NOTICE: Part II

DOCUMENT ACTION: Proposed Rule.

SUBJECT CATEGORY: Sale and Issue of Marketable Book-Entry Treasury Bills, Notes, and Bonds--Plain Language Uniform Offering Circular

DATES: Send your comments to reach us on or before February 23, 2004.

DOCUMENT SUMMARY: The Department of the Treasury (``Treasury,'' ``We,'' or ``Us'') proposes to amend 31 CFR Part 356 (Uniform Offering Circular for the Sale and Issue of Marketable BookEntry Treasury Bills, Notes, and Bonds) by converting it to plain language. We are proposing this amendment to make our marketable securities auction rules easier to understand. This amendment would also make certain minor revisions to better make the auction rules conform to current practices.

SUMMARY: Treasury Department, Fiscal Service,

SUPPLEMENTAL INFORMATION

Executive Order 12866 requires each agency to write regulations that are simple and easy to understand. In addition to requiring us to write new regulations in plain language, a Presidential memorandum dated June 2, 1998, directs us to consider rewriting existing regulations in plain language. The Uniform Offering Circular (UOC), in conjunction with the announcement for each auction, provides the terms and conditions for the sale and issuance in an auction to the public of marketable Treasury bills, notes and bonds.\1\ We have rewritten the UOC in plain language because the wide variety of bidders in our securities auctionsbrokerdealers, depository institutions, nonfinancial firms, individuals, etc.have widely different levels of experience in dealing with federal regulations in general and with securitiesrelated concepts and regulations in particular. We also believe that better understanding of the auction rules may increase direct participation in our auctions and improve the auction process overall, resulting in lower borrowing costs. \1\ The Uniform Offering Circular was published as a final rule on January 5, 1993 (58 FR 412). The circular, as amended, is codified at 31 CFR Part 356.

In addition to rewriting the existing regulations in plain language, we are proposing to make certain minor revisions to better make the auction rules conform to current auction practices. For example, we have eliminated references to multipleprice auctions since we now use singleprice auctions for all marketable Treasury securities. We also have renamed ``inflationindexed'' securities as ``inflationprotected'' securities so that the resulting acronym, TIPS, conforms with the way these securities are commonly referred to by market participants and the press.

We also have made several organizational changes to streamline the regulations and to aid their readability. For example, in section 356.11, which addresses how bidders may submit bids, the current UOC is organized according to whether the bid is submitted on a paper tender form or by computer. In the plainlanguage version, the section is organized by whether we will be issuing awarded securities in the commercial bookentry system or in the TreasuryDirect bookentry system. This reorganization was done to make it easier for different types of biddersfirms and institutions versus individuals, for exampleto find out their respective bidding requirements.

Appendix A, which describes different bidder categories, has also been reorganized in the way it describes the process for requesting separatebidder status. The UOC currently describes this process separately for corporations and for partnerships. The plainlanguage version describes how to obtain separatebidder recognition in a single location within Appendix A, thereby eliminating repetitive parallel language. Please note that Appendix A of the proposed rule adds a definition of ``Foreign and International Monetary Authorities,'' a category of bidder that was not previously described in the UOC.

Finally, we are proposing to eliminate the two exhibits at the end of the UOC. Exhibit A provides sample auction announcements. Exhibit B is a sample autocharge agreement. Both auction announcements and autocharge agreements are subject to more frequent revision than the UOC itself, and examples of both are readily available at the Bureau of the Public Debt's Web site at http://www.publicdebt.treas.gov.

We invite your comments on how to make these proposed regulations easier to understand, including answers to questions such as the following: (1) Are the requirements in the proposed regulations clearly stated? (2) Do the proposed regulations contain technical language or jargon that interferes with their clarity? (3) Does the format of the proposed regulations (grouping and order of sections, use of headings, paragraphing, etc.) aid or reduce their clarity? (4) Would the regulations be easier to understand if they were divided into more (but shorter) sections? (A section appears in bold type and is preceded by the section symbol and a numbered heading, for example, Sec. 356.20 How does the Treasury determine auction awards?)

Procedural Requirements

It has been determined that this is not a significant regulatory action for purposes of 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.

The Office of Management and Budget previously approved the collections of information in this proposed amendment in accordance with the Paperwork Reduction Act under control number 15350112. We are only rewriting the UOC in plain language and are not proposing substantive changes to these requirements that would impose additional burdens on auction bidders.

List of Subjects in 31 CFR Part 356

Bonds, Federal Reserve System, Government Securities, Securities. [[Page 74295]]

For the reasons stated in the preamble, we propose to revise 31 CFR Part 356 to read as follows:
PART 356SALE AND ISSUE OF MARKETABLE BOOKENTRY TREASURY BILLS, NOTES, AND BONDS (DEPARTMENT OF THE TREASURY CIRCULAR, PUBLIC DEBT SERIES NO. 193)
Subpart AGeneral Information
Sec.
356.0 What authority does the Treasury have to sell and issue securities?
356.1 To which securities does this circular apply?
356.2 What definitions do I need to know to understand this part? 356.3 What is the role of the Federal Reserve Banks in this process? 356.4 What are the bookentry systems in which auctioned Treasury securities may be issued?
356.5 What types of securities does the Treasury auction?
Subpart BBidding, Certifications, and Payment
356.10 What is the purpose of an auction announcement?
356.11 How are bids submitted in an auction?
356.12 What are the different types of bids and do they have specific requirements or restrictions?
356.13 When must I report my net long position and how do I calculate it?
356.14 What are the requirements for submitting bids for customers? 356.15 What rules apply to bids submitted by investment advisers? 356.16 Do I have to make any certifications?
356.17 How and when do I pay for securities awarded in an auction? Subpart CDetermination of Auction Awards; Settlement
356.20 How does the Treasury determine auction awards?
356.21 How are awards at the high yield or discount rate calculated? 356.22 Does the Treasury have any limitations on auction awards? 356.23 How are the auction results announced?
356.24 Will I be notified directly of my awards and, if I am submitting bids for others, do I have to provide confirmations? 356.25 How does the settlement process work?
Subpart DMiscellaneous Provisions
356.30 When does the Treasury pay principal and interest on securities?
356.31 How does the STRIPS program work?
356.32 What tax rules apply?
356.33 Does the Treasury have any discretion in the auction process? 356.34 What could happen if someone does not fully comply with the auction rules or fails to pay for securities?
356.35 Who approved the information collections?
Appendix A to Part 356Bidder Categories
Appendix B to Part 356Formulas and Tables
Appendix C to Part 356Investment Considerations
Appendix D to Part 356Description of the Consumer Price Index

Authority: 5 U.S.C. 301; 31 U.S.C. 3102, et seq.; 12 U.S.C. 391. Subpart AGeneral Information
Sec. 356.0 What authority does the Treasury have to sell and issue securities?

Chapter 31 of Title 31 of the United States Code authorizes the Secretary of the Treasury to issue United States obligations, and to offer them for sale with the terms and conditions that the Secretary prescribes.

Sec. 356.1 To which securities does this circular apply?

The provisions in this part, including the appendices, and each individual auction announcement govern the sale and issuance of marketable Treasury securities issued on or after March 1, 1993. This part also governs all securities eligible for the Separate Trading of Registered Interest and Principal of Securities (STRIPS) Program (See Sec. 356.31). In addition, these provisions and the auction announcements govern any other types of securities we may issue under this part.
Sec. 356.2 What definitions do I need to know to understand this part?

Accrued interest means an amount that bidders must pay to us for interest income as part of the settlement amount. Accrued interest compensates us up front for interest that bidders will be paid but did not earn because it is attributable to a period of time prior to the issue date. (See Appendix B, section I, paragraph C for additional explanation and examples.)

Adjusted value means, for an interest component stripped from an inflationprotected security, an amount derived by:
(1) Multiplying the semiannual interest rate by the par amount, and then
(2) Multiplying this value by: 100 divided by the Reference CPI of the original issue date (or dated date, when the dated date is different from the original issue date). (See Appendix B, section IV for an example of how to calculate the adjusted value.)

Auction means a bidding process by which we sell marketable Treasury securities to the public.

Autocharge agreement means an agreement in a format acceptable to Treasury between a submitter or clearing corporation and a depository institution that authorizes us to:
(1) Deliver awarded securities to either:
(i) The bookentry securities account of a designated depository institution in the commercial bookentry system, or
(ii) A TreasuryDirect account, and
(2) Charge a funds account of a designated depository institution for the settlement amount of the securities.

Bid means an offer to purchase a stated par amount of securities, either competitively or noncompetitively, in an auction.

Bidtocover ratio means the total par amount of securities bid for in an auction divided by the total par amount of securities awarded. It excludes bids by, and awards to, the Federal Reserve for its own account.

Bidder, as further defined in Appendix A, means a person or an entity that offers to purchase Treasury securities in an auction either directly or through a depository institution or dealer. We may consider two or more persons or entities to be one bidder based on their relationship or their actions in participating in an auction.

Bidder Identification Number means a number we assign to each institutional submitter and to certain other competitive bidders. We assign such numbers either to identify certain bidders or to grant separate bidder status to different parts of the same corporate or partnership structure.

Bookentry security means a security that is issued and maintained as an accounting entry or electronic record in either the commercial bookentry system or in TreasuryDirect. (See Sec. 356.3)

Business day means any day on which the Federal Reserve Banks are open for business.

Call means the redemption of a security prior to maturity under the terms specified in its auction announcement.

Clearing corporation means a clearing agency as defined in section 3 of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(23)). A clearing corporation must be registered with the Securities and Exchange Commission under section 17A of the Securities Exchange Act of 1934 and its rules.

Competitive bid means a bid to purchase a stated par amount of securities at a specified yield or discount rate.

Consumer Price Index (CPI) means the monthly nonseasonally adjusted U.S. City Average All Items Consumer Price Index for All Urban Consumers, published by the Bureau of Labor
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Statistics of the Department of Labor. We use the CPI as the basis for adjusting the principal amounts of inflationprotected securities. (See Appendix D)

Corpus means the principal component of a security that has been stripped of its interest components.

CUSIP number means the unique identifying number assigned to each separate security issue and each separate STRIPS component. CUSIP numbers are provided by the CUSIP Service Bureau of Standard & Poor's Corporation. CUSIP is an acronym for Committee on Uniform Securities Identification Procedures.

Customer means a bidder that directs a depository institution or dealer to submit or forward a bid for a specific amount of securities in a specific auction on the bidder's behalf. Only depository institutions and dealers may submit bids for customers directly to us, or forward them to another depository institution or dealer.

Dated date means the date from which interest accrues for notes and bonds. The dated date and issue date are usually the same. In those cases where interest begins accruing prior to the issue date, however, the dated date will be prior to the issue date. An example is when the dated date is a Saturday and the issue date is the following Monday.

Dealer means an entity that is registered or has given notice of its status as a government securities broker or government securities dealer under Section 15C(a)(1) of the Securities Exchange Act of 1934.

Depository institution means:
(1) An entity described in Section 19(b)(1)(A), excluding subparagraph (vii), of the Federal Reserve Act (12 U.S.C.
461(b)(1)(A)).
(2) Any agency or branch of a foreign bank as defined by the International Banking Act of 1978, as amended (12 U.S.C. 3101).

Discount means the difference between par and the price of the security, when the price is less than par. (See Appendix B for formulas and examples.)

Discount amount means the discount divided by 100 and multiplied by the par amount. (See Appendix B for formulas and examples.)

Discount rate means a rate of return, on an annual basis, on bills held until they mature. The discount rate is expressed in percentage terms and based on a 360day year. It is also referred to as the ``bank discount rate.'' (See Appendix B for formulas and examples.)

Funds account means a cash account maintained by a depository institution at a Federal Reserve Bank.

Index means the Consumer Price Index.

Index ratio means, for an inflationprotected security, the Reference CPI of a particular date divided by the Reference CPI of the original issue date. (When the dated date is different from the original issue date, the denominator of the index ratio is the Reference CPI of the dated date rather than that of the original issue date.)

Inflationadjusted principal means, for an inflationprotected security, the value of the security derived by multiplying the par amount by the applicable index ratio as described in Appendix B, section I, paragraph B.

Interest rate means the annual percentage rate of interest paid on the par amount (or the inflationadjusted principal) of a specific issue of notes or bonds. (See Appendix B for methods and examples of interest calculations on notes and bonds.)

Intermediary means a depository institution or dealer that forwards bids for customers to another depository institution or dealer. An intermediary does not submit bids directly to us.

Issue date means the date specified in the auction announcement on which we issue a security as an obligation of the United States. Interest normally begins to accrue on a security's issue date.

Marketable security means a security that may be bought, sold and transferred in the secondary market.

Maturity date means the date on which a security becomes due and payable, and ceases to earn interest. The maturity date is specified in the auction announcement.

Minimum to bid means the smallest amount of a security that may be bid for in an auction as stated in the auction announcement.

Multiple to bid means the smallest additional amount of a security that may be bid for in an auction as stated in the auction announcement.

Noncompetitive bid means a bid to purchase a stated par amount of securities at the yield or discount rate awarded to competitive bidders.

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

Par means a price of 100. (See Appendix B)

Par amount means the stated value of a security at original issuance.

Person means a natural person.

Premium means the difference between par and the price of the security, when the price is greater than par.

Premium amount means the premium divided by 100 and multiplied by the par amount.

Price means the price of a security as calculated using the formulas in Appendix B.

Real yield means, for an inflationprotected security, the yield based on the payment stream in constant dollars. In other words, the real yield is the yield in the absence of inflation.

Reference CPI (Ref CPI) means, for an inflationprotected security, the index number applicable to a given date. (See Appendix B, section I, paragraph B)

Reopening means the auction of an additional amount of an outstanding security.

Security means a Treasury bill, note, or bond, each as described in this part. Security also means any other obligation we issue that is subject to this part according to its auction announcement. Security includes an interest or principal component under the STRIPS program.

Settlement means final and complete payment for securities awarded in an auction and delivery of those securities.

Settlement amount means the total of the par amount of securities awarded, less any discount amount or plus any premium amount, and plus any accrued interest. For inflationprotected securities, the settlement amount also includes any inflation adjustment when such securities are reopened or when the dated date is different from the issue date.

STRIPS (Separate Trading of Registered Interest and Principal of Securities) means our program under which eligible securities are authorized to be separated into principal and interest components, and transferred separately. These components are maintained and transferred in the commercial bookentry system.

Submitter means a person or entity submitting bids directly to us for its own account, for customer accounts, or both. Only depository institutions and dealers are permitted to submit bids for customer accounts. We permit investment advisers to submit bids on behalf of controlled accounts.

TINT means an interest component from a stripped security.

TreasuryDirect[reg] means the TreasuryDirect BookEntry Securities System. (See 31 CFR 357, subpart C)

We (or ``us'') means the Secretary of the Treasury and his or her delegates, including the Department of the Treasury, Bureau of the Public Debt, and their representatives. The term also includes Federal Reserve Banks acting as fiscal agents of the United States.

Yield means the annualized rate of return to maturity on a fixed principal security. Yield is expressed as a percentage. For an inflationprotected
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security, yield means the real yield. Yield is also referred to as ``yield to maturity.'' (See Appendix B)

You means a prospective bidder in an auction.
Sec. 356.3 What is the role of the Federal Reserve Banks in this process?

The Treasury Department authorizes Federal Reserve Banks, as fiscal agents of the United States, to perform all activities necessary to carry out the provisions of this part, any auction announcements, and applicable regulations.
Sec. 356.4 What are the bookentry systems in which auctioned Treasury securities may be issued?

We issue Treasury marketable securities into either of two book entry securities systemsthe commercial bookentry system or TreasuryDirect. We maintain and transfer securities in these two book entry systems at their par amount. For example, par amounts of inflationprotected securities do not include adjustments for inflation. Securities may be transferred from one system to the other. See Department of the Treasury Circular, Public Debt Series No. 286, as amended (31 CFR Part 357).
(a) The commercial bookentry system. When depository institutions or dealers submit bids for Treasury securities in an auction, securities awarded as a result of those bids are generally held in the commercial bookentry system. Specifically, we maintain bookentry accounts in the National BookEntry System[reg] (``NBES'') for Federal Reserve Banks, depository institutions, and other authorized entities, such as government and international agencies and foreign central banks. In their accounts, depository institutions maintain securities held for their own account and for the accounts of others. The accounts held for others include those of other depository institutions and dealers, which may, in turn, maintain accounts for others.
(b) TreasuryDirect. In this system, we maintain the bookentry securities of account holders directly on the records of the Bureau of the Public Debt, Department of the Treasury. Bids for securities to be held in TreasuryDirect are generally submitted directly to us, although such bids may also be forwarded to us by a depository institution or dealer.
Sec. 356.5 What types of securities does the Treasury auction?

We offer securities under this part exclusively in bookentry form and as direct obligations of the United States issued under Chapter 31 of Title 31 of the United States Code. The securities are subject to the terms and conditions in this part, the regulations governing book entry Treasury bills, notes, and bonds (31 CFR Part 357), and the auction announcements. When we issue additional securities with the same CUSIP number as outstanding securities, we consider them to be the same securities as the outstanding securities.
(a) Treasury bills.(1) Are issued at a discount;
(2) Are redeemed at their par amount at maturity; and
(3) Have maturities of not more than one year.
(b) Treasury notes.(1) Treasury fixedprincipal \1\ notes. \1\ We use the term ``fixedprincipal'' in this part to distinguish such securities from ``inflationprotected'' securities. We refer to fixedprincipal notes and fixedprincipal bonds as ``notes'' and ``bonds'' in official Treasury publications, such as auction announcements and auction results press releases, as well as in auction systems.
(i) Are issued with a stated rate of interest to be applied to the par amount;
(ii) Have interest payable semiannually;
(iii) Are redeemed at their par amount at maturity;
(iv) Are sold at discount, par, or premium, depending upon the auction results; and
(v) Have maturities of at least one year, but of not more than ten years.
(2) Treasury inflationprotected notes.(i) Are issued with a stated rate of interest to be applied to the inflationadjusted principal on each interest payment date;
(ii) Have interest payable semiannually;
(iii) Are redeemed at maturity at their inflationadjusted principal, or at their par amount, whichever is greater;
(iv) Are sold at discount, par, or premium, depending on the auction results (See Appendix B for price and interest payment calculations and Appendix C for Investment Considerations.); and (v) Have maturities of at least one year, but not more than ten years.
(c) Treasury bonds(1) Treasury fixedprincipal bonds.
(i) Are issued with a stated rate of interest to be applied to the par amount;
(ii) Have interest payable semiannually;
(iii) Are redeemed at their par amount at maturity;
(iv) Are sold at discount, par, or premium, depending on the auction results; and
(v) Have maturities of more than ten years.
(2) Treasury inflationprotected bonds.(i) Are issued with a stated rate of interest to be applied to the inflationadjusted principal on each interest payment date;
(ii) Have interest payable semiannually;
(iii) Are redeemed at maturity at their inflationadjusted principal, or at their par amount, whichever is greater;
(iv) Are sold at discount, par, or premium, depending on the auction results; and
(v) Have maturities of more than ten years. (See Appendix B for price and interest payment calculations and Appendix C for Investment Considerations.)
Subpart BBidding, Certifications, and Payment
Sec. 356.10 What is the purpose of an auction announcement?

By issuing an auction announcement, we provide public notice of the sale of bills, notes, and bonds. The auction announcement lists the specifics of each auction, e.g., offering amount, term and type of security, CUSIP number, and issue and maturity dates. The auction announcement and this part, including the Appendices, specify the terms and conditions of sale. If anything in the auction announcement differs from this part, the auction announcement will control. If you intend to bid, you should read the applicable auction announcement along with this part.
Sec. 356.11 How are bids submitted in an auction?
(a) General. (1) Bids must be submitted using an approved method, which depends on whether you are requesting us to issue the awarded securities in the commercial bookentry system or in TreasuryDirect (See Sec. 356.3). The approved submission methods for these respective systems are explained in this section. A bidder must provide its assigned bidder identification numbers if it has been assigned one. We have the option of accepting or rejecting incomplete bids.
(2) We must receive competitive and noncompetitive bids prior to their respective closing times, which are stated in the auction announcement. We will not include late bids in the auction. For bids other than those submitted on paper forms, our computer time stamp will establish the receipt time. You are bound by your bids after the closing time.
(3) We are not responsible for any delays, errors, or omissions. We are not responsible for any failures or disruptions of equipment or [[Page 74298]]
communications facilities used for participating in Treasury auctions. (b) Commercial bookentry system. (1) If you are a submitter and the awarded securities are to be issued in the commercial bookentry system, you must submit bids using one of our approved electronic methods except for contingency situations.
(2) You must have an agreement on file with us under which you agree to our terms and conditions for access to our system for participating in our auctions.
(3) In contingency situations, such as a power outage, we may accept bids by telephone if you submit them prior to the relevant bidding deadline.
(c) TreasuryDirect. (1) If you are a submitter and the awarded securities are to be issued in TreasuryDirect, you may submit bids by using one of our approved methods, e.g., computer, automated telephone service, or paper forms. You may also reinvest the proceeds of maturing securities into new securities by completing the appropriate transaction request on time.
(2) If you are submitting bids by paper form, you must use forms authorized by the Bureau of the Public Debt and provide the requested information. We have the option of accepting or rejecting bids on any other form. You are responsible for ensuring that we receive bids in paper form on time. A competitive bid is on time if we receive it prior to the deadline for the receipt of competitive bids. A noncompetitive bid is on time if:
(i) We receive it on or before the issue date, and
(ii) The envelope it arrived in bears evidence, such as a U.S. Postal Service cancellation, that it was mailed prior to the auction date.
(3) If you are submitting a bid by computer or telephone you must be an established TreasuryDirect account holder with a Taxpayer Identification Number. You may not submit a competitive bid by computer or telephone.
Sec. 356.12 What are the different types of bids and do they have specific requirements or restrictions?
(a) General. All bids must state the par amount of securities bid for and must equal or exceed the minimum to bid amount stated in the auction announcement. Bids in larger amounts must be in the multiple stated in the auction announcement.
(b) Noncompetitive bids.(1) Maximum bid. You may not bid noncompetitively for more than $1 million in a bill auction or more than $5 million in a note or bond auction. The maximum bid limitation does not apply if you are bidding solely through a TreasuryDirect reinvestment request. A request for reinvestment of securities maturing in TreasuryDirect is a noncompetitive bid.
(2) Additional restrictions. You may not bid noncompetitively in an auction in which you are bidding competitively. You may not bid noncompetitively if, in the security being auctioned, you hold a position in whenissued trading or in futures or forward contracts at any time between the date of the auction announcement and the time we announce the auction results. During this same timeframe, a noncompetitive bidder may not enter into any agreement to purchase or sell or otherwise dispose of the securities it is acquiring in the auction. For this paragraph, futures contracts include those: (i) That require delivery of the specific security being auctioned; (ii) For which the security being auctioned is one of several securities that may be delivered; or
(iii) That are cashsettled.
(c) Competitive bids.
(1) Bid format(i) Treasury bills. A competitive bid must show the discount rate bid, expressed with three decimals in .005 percent increments. The third decimal must be either a zero or a five, for example, 5.320 or 5.325.
(ii) Treasury fixedprincipal securities. A competitive bid must show the yield bid, expressed with three decimals, for example, 4.170. (iii) Treasury inflationprotected securities. A competitive bid must show the real yield bid, expressed with three decimals, for example, 3.070.
(2) Maximum recognized bid. There is no limit on the maximum dollar amount that you may bid for competitively, either at a single yield or discount rate, or at different yields or discount rates. However, a competitive bid at a single yield or discount rate that exceeds 35 percent of the offering amount will be reduced to that amount. For example, if the offering amount is $10 billion, the maximum bid amount we will recognize at any one yield or discount rate from any bidder is $3.5 billion. (See Sec. 356.22 for award limitations.)
(3) Additional restriction. You may not bid competitively in an auction in which you are bidding noncompetitively.
Sec. 356.13 When must I report my net long position and how do I calculate it?
(a) Net long position reporting threshold.
(1) If you are bidding competitively in an auction, you must report your net long position when the total of your bids plus your net long position in the security being auctioned equals or exceeds the net long position reporting threshold (See table). We will specify this threshold in the auction announcement for each security (See Sec. 356.10). The threshold is typically 35 percent of the offering amount, but we may state a different threshold in the auction announcement. To see whether you must report your net long position, follow this table: If . . . And If. . . Then. . . (i) the total of your bids .................... you must report your and your net long position net long position in the security being (which does not auctioned equals or exceeds include your bids). the reporting threshold.
(ii) the total of your bids you have no position you must report a in the auction equals or or a net short zero.
exceeds the reporting position in the
threshold. security being
auctioned.
(iii) the total of your bids .................... you may either and your net long position report nothing in the security being (leave the field auctioned is less than the blank) or report reporting threshold. your net long position. (2) Also, if you have more than one bid in an auction and you must report either your net long position or a zero, you must report that figure only once. Finally, if you are a customer and must report either your net long position or a zero, you must report that figure through only one depository institution or dealer. (See Sec. 356.14(d)) (b) ``As of'' time for calculating net long position. You must calculate your net long position as of one halfhour prior to the closing time for receipt of competitive bids.
(c) Components of the net long position. Except as modified in (d) of this section, your net long position is the sum total of the par amounts of:
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(1) Your holdings of outstanding securities with the same CUSIP number as the security being auctioned;
(2) Your holdings of STRIPS principal components of the security being auctioned, and;
(3) Your positions, in the security being auctioned, in: (i) Whenissued trading, including whenissued trading positions of the STRIPS principal components;
(ii) Futures contracts that require delivery of the specific security being auctioned (but not futures contracts for which the security being auctioned is one of several securities that may be delivered, and not futures contracts that are cashsettled); and (iii) Forward contracts that require delivery of the specific security being auctioned or of the STRIPS principal component of that security.
(d) Calculating the net long position in a reopening. In a reopening (additional issue) of an outstanding security, you may subtract the exclusion amount stated in the auction announcement from: (1) Your holdings of the outstanding securities (paragraph (c)(1) of this section) combined with
(2) Your holdings of STRIPS principal components of the security being auctioned (paragraph (c)(2) of this section). We will specify the amount of holdings that you may exclude from the net long position calculation in the auction announcement. You may not take the exclusion if your combined holdings are zero or less. The exclusion is optional, but if you take the exclusion, you must include any holdings that exceed the exclusion amount in calculating your net long position. If the exclusion amount is greater than your combined holdings (paragraphs (c)(1) and (2) of this section), you may calculate the combined holdings as zero, but they cannot be included in the calculation as a negative number.
Sec. 356.14 What are the requirements for submitting bids for customers?
(a) Institutions that may submit bids for customers. Only depository institutions or dealers may submit bids for customers, or for customers of intermediaries, under the requirements set out in this section. If a bid from a depository institution or a dealer fulfills a guarantee to a customer to sell a specified amount of securities at an agreedupon price, or a price fixed in terms of an agreedupon standard, then the bid is a bid of that depository institution or dealer. It is not a customer bid.
(b) Payment. Submitters must remit payment for bids they submit on behalf of customers, including customers of intermediaries, that result in awards of securities in the auction.
(c) Identifying customers. Submitters must provide the names of customers whenever they submit bids for them. Submitters must provide the names of their direct customers as well as customers of any intermediaries who are forwarding customer bids. For individuals, submitters must provide the customer's full name (first and last). For institutional customers, submitters must provide the name of the institution, and the bidder identification number if the customer provides it. For trusts or other fiduciary estates (See Appendix A), submitters must provide on the customer list:
(1) The full name or title of the trustee or fiduciary; (2) A reference to the document creating the trust or fiduciary estate with date of execution; and
(3) The employer identification number (not social security number) of the trust or fiduciary estate. We do not consider trusts to be a separate bidder that have not been assigned, or that do not provide, an employer identification number.
(d) Competitive customer bids. For each customer competitive bid, the submitter must provide the customer's name, the amount bid, and the yield or discount rate. The submitter or intermediary must also report the net long position amount if the customer provides it. The submitter must inform a customer of the net long position reporting requirement (See Sec. 356.13) if the customer is bidding for $100 million or more of securities. If the submitter's or intermediary's personnel know that the customer's position information is not correct, the submitter or intermediary may not submit the customer's bid.
(e) Noncompetitive customer bids. For each noncompetitive bid, the submitter must provide the customer's name and the amount bid. Submitters may either provide the customer's name with the bid or, if the list of customers is lengthy, the submitter may provide a summary bid amount covering all noncompetitive customers. If it provides a summary bid amount, the submitter must transmit the list of individual customers and their bid amounts by close of business on the auction day. However, the submitter must be able to provide the customer list details by the noncompetitive bidding deadline if requested. Sec. 356.15 What rules apply to bids submitted by investment advisers?
(a) General. The auction rules that apply to investment advisers are determined by the relationship between ``investment advisers'' and ``controlled accounts.'' An investment adviser means any person or entity that has investment discretion for the bids or positions of a different person or entity (a controlled account). A person or entity has investment discretion if it determines what, when, and what quantity of securities will be purchased or sold on behalf of another person or entity. We consider a person that is employed or supervised by an investment adviser to be part of that investment adviser. We also consider the bids or positions of controlled accounts to be separate from the bids or positions of the person or entity with which they would otherwise be associated under the bidder categories in Appendix A of this part.
(b) Bidding options.(1) An investment adviser has two options for whose name to use when bidding on behalf of controlled accounts. An investment adviser may bid for a In such cases, we consider the controlled account . . . bidder to be . . . (i) in the investment adviser's own the investment adviser. name.
(ii) in the name of the controlled the controlled account. account.
(2) Using the first option (paragraph (b)(1)(i)), an investment advisor could bid noncompetitively up to the noncompetitive bidding limit only for itself, as a single bidder. Using the second option (paragraph (b)(1)(ii)), an investment adviser could bid
noncompetitively for each separately named controlled account up to the noncompetitive bidding limit. The investment adviser could also bid noncompetitively in its own name in the same auction up to the noncompetitive bidding limit. An investment adviser may not bid for a controlled account both noncompetitively and competitively in the same auction. If an investment
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adviser is bidding competitively in the name of a controlled account, the controlled account is subject to the award limitations of Sec. 356.22(b).
(c) Reporting net long positions. If it is bidding competitively, an investment adviser must calculate the amount of its bids and positions for purposes of the net long position reporting requirement found in Sec. 356.13(a). In addition to its own competitive bids and positions, the investment adviser must also include in the calculation all other competitive bids and positions that it controls. If the net long position is reportable, the investment adviser must report it as a total in connection with only one bid as stated in Sec. 356.13(a). This requirement applies regardless of whether the investment adviser bids in its own name or in the name of its controlled accounts. The following table shows which positions an investment adviser must include to determine whether it meets the net long position reporting threshold in Sec. 356.13(a). If an investment adviser does meet the reporting threshold, the table also shows which positions must be included in, and which may be excluded from, the net long position calculation.
If an investment adviser is bidding
competitively, and . . . Then . . . (1) the investment adviser has a net that position must be included long position for its own account. in the investment adviser's net long position calculation. (2) the investment adviser's any net long position of that competitive bid is for a controlled account must be included in account. the investment adviser's net long position calculation. (3) the investment adviser is not
bidding competitively for a controlled
account and . . .
(i) the controlled account has a that position must be included net long position of $100 million in the investment adviser's or more. net long position calculation. (ii) the controlled account has a that position may be excluded net long position that is less from the investment adviser's than $100 million. net long position calculation. (iii) any net long position is all net short positions of excluded under paragraph controlled accounts under $100 (b)(3)(ii) of this table. million must also be excluded. (d) Certifications. When an investment adviser bids for a controlled account, we deem the investment adviser to have certified that it is complying with this part and the auction announcement for the security. Further, we deem the investment adviser to have certified that the information it provided about bids for controlled accounts is accurate and complete.
(e) Proration of awards. Investment advisers that submit competitive bids in the names of controlled accounts are responsible for prorating any awards at the highest accepted yield or discount rate using the same percentage that we announce. See Sec. 356.21 for examples of how to prorate.
Sec. 356.16 Do I have to make any certifications?
(a) Submitters. If you submit bids or other information in an auction, we deem you to have certified that:
(1) You are in compliance with this part and the auction announcement;
(2) The information provided with regard to any bids for your own account is accurate and complete; and
(3) The information provided with regard to any bids for customers accurately and completely reflects information provided by your customers or intermediaries.
(4) If you submit bids by computer, you must have on file a written certification that, each time you submit such bids, you are in compliance with this part and the applicable auction announcement. An authorized person must sign and date the certification on behalf of the submitter, and it must be filed with us and renewed at least annually. (b) Intermediaries. If you forward bids in an auction, we deem you to have certified that:
(1) You are in compliance with this part and the applicable auction announcement; and
(2) That the information you provided to a submitter or other intermediary with regard to bids for customers accurately and completely reflects information provided by those customers or intermediaries.
(c) Customers. By bidding for a security as a customer we deem you to have certified that:
(1) You are in compliance with this part and the auction announcement and;
(2) The information you provided to the submitter or intermediary in connection with the bid is accurate and complete.
Sec. 356.17 How and when do I pay for securities awarded in an auction?
(a) General. By bidding in an auction, you agree to pay the settlement amount for any securities awarded to you. (See Sec. 356.25) For notes and bonds, the settlement amount may include a premium amount, accrued interest, and, for inflationprotected securities, an inflation adjustment.
(b) TreasuryDirect. Unless you make other provisions, you must submit payment with your bids or pay by debit entry to a deposit account. To pay by debit entry, you must first authorize us to make debit entries to your deposit account under 31 CFR part 370. Payment by debit entry occurs on the settlement date for the actual settlement amount due. (See Sec. 356.25) You may also pay for reinvestments with maturing securities, however, you must pay separately for any premium, accrued interest, or inflation adjustment as soon as you receive your Payment Due Notice.
(1) Bidding by computer or by telephone. If you are bidding by computer or by telephone, you must pay for any securities awarded to you by debit entry to a deposit account.
(2) Bidding by paper form. If you are mailing bids to us on a paper form, you may either enclose your payment with the form or pay for any securities awarded to you by debit entry to a deposit account. (i) Payment with paper form. For bills, you may pay by depository institution (cashier's or teller's) check, certified check, or currently dated Treasury or fiscal agency check made payable to you. For notes or bonds, in addition to the payment options for bills, you may also pay by personal check. If you submit a personal check, make it payable to TreasuryDirect and mail it to the Federal Reserve Bank handling your account. In your payment amount you must include the par amount and any announced accrued interest and/or inflation adjustment. (ii) Payment by debit entry to a deposit account. If a depository institution or dealer is submitting your bids for securities to be held in
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TreasuryDirect, payment may be either by debit entry to a deposit account or by allowing us to charge the Federal Reserve Bank funds account of a depository institution.
(3) Payment by maturing securities. You may use maturing securities held in TreasuryDirect as payment for reinvestments into new securities that we are offering, as long as we receive the appropriate transaction request on time.
(c) Commercial bookentry system. For securities to be held in the commercial bookentry system, payment of the settlement amount must be by charge to the funds account of a depository institution at a Federal Reserve Bank.
(1) A submitter that does not have a funds account at a Federal Reserve Bank or that chooses not to pay by charge to its own funds account must have an approved autocharge agreement on file with us before submitting any bids. Any depository institution whose funds account will be charged under an autocharge agreement will receive advance notice from us of the total par amount of, and price to be charged for, securities awarded as a result of the submitter's bids. (2) A submitter that is a member of a clearing corporation may instruct that delivery and payment be made through the clearing corporation for securities awarded to the submitter for its own account. To do this, the following requirements must be met prior to submitting any bids:
(i) We must have acknowledged and have on file an autocharge agreement between the clearing corporation and a depository institution. By entering into such an agreement, the clearing corporation authorizes us to provide aggregate par and price information to the depository institution whose funds account will be charged under the agreement. The clearing corporation is responsible for remitting payment for auction awards of the clearing corporation member.
(ii) We must have acknowledged and have on file a delivery and payment agreement between the submitter and the clearing corporation. By entering into such an agreement, the submitter authorizes us to provide award and payment information to the clearing corporation. Subpart CDetermination of Auction Awards; Settlement
Sec. 356.20 How does the Treasury determine auction awards? (a) Determining the range and amount of accepted competitive bids. (1) Accepting bids. First we accept in full all noncompetitive bids that were submitted by the noncompetitive bidding deadline. After the closing time for receipt of competitive bids we start accepting those at the lowest yields or discount rates through successively higher yields or discount rates, up to the amount required to meet the offering amount. When necessary, we prorate bids at the highest accepted yield or discount rate as described below. If the amount of noncompetitive bids would absorb most or all of the offering amount, we will accept competitive bids in an amount sufficient to provide a fair determination of the yield or discount rate for the securities we are auctioning.
(2) Accepting bids at the high yield or discount rate. Generally, the total amount of bids at the highest accepted yield or discount rate exceeds the offering amount remaining after we accept the
noncompetitive bids and the competitive bids at the lower yields or discount rates. In order to keep the total amount of awards as close as possible to the announced offering amount, we award a percentage of the bids at the highest accepted yield or discount rate. We derive the percentage by dividing the remaining par amount needed to fill the offering amount by the par amount of the bids at the high yield or discount rate and rounding up to the next hundredth of a whole percentage point, for example, 17.13%.
(b) Determining the interest rate for new note and bond issues. We set the interest rate at the 1/8 of one percent increment that produces the price closest to, but not above, par when evaluated at the yield of awards to successful competitive bidders.
(c) Determining purchase prices for awarded securities. For both noncompetitive bidders and competitive bidders, we convert the highest accepted discount rate or yield to a price expressed as a price per hundred. This price is rounded to three decimals, for example, 99.954. (See Appendix B) For inflationprotected securities, the price for awarded securities is the price equivalent to the highest accepted real yield.
Sec. 356.21 How are awards at the high yield or discount rate calculated?
(a) Awards to submitters. We generally prorate bids at the highest accepted yield or discount rate under Sec. 356.20(a)(2) of this part. For example, if 80.15% is the announced percentage at the highest yield or discount rate, we award 80.15% of the amount of each bid at that yield or rate. A bid for $100 million at the highest accepted yield or discount rate would be awarded $80,150,000 in this example. We always make awards for at least the minimum to bid, and above that amount we make awards in the appropriate multiple to bid. For example, Treasury bills may be issued with a minimum to bid of $1,000 and multiples to bid of $1,000. Say we accept an $18,000 bid at the high discount rate, and the percent awarded at the high discount rate is 88.27%. We would award $16,000 to that bidder, which is an upward adjustment from $15,888.60 ($18,000 x .8827) to the nearest multiple of $1,000. If we were to award 4.65% of bids at the highest accepted rate, for example, the award for a $10,000 bid at that rate would be $1,000, rather than $465, in order to meet the minimum to bid for a bill issue. (b) Awards to customers. The same prorating rules apply to customers as apply to submitters. Depository institutions and dealers, whether submitters or intermediaries, are responsible for prorating awards for their customers at the same percentage that we announce. For example, if 80.15% is the announced percentage at the highest yield or discount rate, then each customer bid at that yield or rate must be awarded 80.15%.
Sec. 356.22 Does the Treasury have any limitations on auction awards? (a) Awards to noncompetitive bidders. The maximum award to any bidder is $1 million for bills and $5 million for notes and bonds. This limit does not apply to bidders bidding solely through TreasuryDirect reinvestment requests.
(b) Awards to competitive bidders. The maximum award is 35 percent of the offering amount less the bidder's net long position as reportable under Sec. 356.13. For example, in a note auction with a $10 billion offering amount, and therefore a maximum award of $3.5 billion, a bidder with a reported net long position of $1 billion could receive a maximum auction award of $2.5 billion. When the bids and net long positions of more than one person or entity must be combined, as is the case with investment advisers and controlled accounts (See Sec. 356.15(c)), we will use this combined amount for the purpose of this 35 percent award limit.
Sec. 356.23 How are the auction results announced?
(a) After the conclusion of the auction, we will announce the auction results through a press release that is available on our Web site at http://www.publicdebt.treas.gov. (b) The press release will include such information as: [[Page 74302]]
(1) The amounts of bids we accepted and the amount of securities we awarded;
(2) The range of accepted yields or discount rates;
(3) The proration percentage;
(4) The interest rate for a note or bond;
(5) A breakdown of the amounts of noncompetitive and competitive bids we accepted from, and awarded to, the public;
(6) The amounts of bids tendered and accepted from the Federal Reserve Banks for their own accounts;
(7) The bidtocover ratio; and
(8) Other information that we may decide to include.
Sec. 356.24 Will I be notified directly of my awards and, if I am submitting bids for others, do I have to provide confirmations? (a) Notice of awards(1) Notice to submitters. We will provide notice to all submitters letting them know whether their bids were successful or not.
(2) Notice to clearing corporations. If we are to deliver awarded securities under a delivery and payment agreement, we will provide notice of the awards to the clearing corporation that is a party to the agreement.
(b) Notification of awards to customers. If you are a submitter for customers, you are responsible for notifying them of their awards. You are also responsible for notifying any intermediaries that forwarded successful bids to you. Similarly, an intermediary is responsible for providing notification of any awards to its customers and any intermediaries from whom it received bids.
(c) Notification of awards and settlement amounts to a depository institution having an autocharge agreement with a submitter or a clearing corporation. We will notify each depository institution that has entered into an autocharge agreement with a submitter or a clearing corporation of the amount to be charged, on the issue date, to the institution's funds account at the Federal Reserve Bank servicing the institution. We will provide this notification no later than the day after the auction.
(d) Customer confirmation. Any customer awarded a par amount of $500 million or more in an auction must send us a confirmation containing the information in paragraphs (d)(1) and (2) of this section. The confirmation must be sent no later than 10:00 a.m. on the day following the auction. The confirmation must be signed by the customer or authorized representative. If signed by an authorized representative, the confirmation must include the capacity in which the representative is acting. A submitter or intermediary submitting or forwarding bids for a customer must notify the customer of this requirement if we award the customer $500 million or more as a result of those bids. The information the customer must provide in writing is: (1) A confirmation of the awarded bid(s), including the name of the depository institution or dealer that submitted the bid(s) on the customer's behalf, and
(2) A statement indicating whether the customer had a reportable net long position as defined in Sec. 356.13. If a position had to be reported, the statement must provide the amount of the position and the name of the depository institution or dealer that the customer requested to report the position.

Sec. 356.25 How does the settlement process work?

Securities bought in the auction must be paid for by the issue date. The payment amount for awarded securities will be the settlement amount as defined in Sec. 356.2. (See formulas in Appendix B.) There are several ways to pay for securities:
(a) Payment by debit entry to a deposit account. If you are paying by debit entry to a deposit account as provided for in Sec. 356.17 (b)(1) or (b)(2), we will charge the settlement amount to the specified account on the issue date.
(b) Payment by authorized charge to a funds account. Where the submitter's method of payment is an authorized charge to the funds account of a depository institution as provided for in Sec. 356.17 (c)(1) and (c)(2), we will charge the settlement amount to the specified funds account on the issue date.
(c) Payment with bids. If you paid the par amount with your bids as provided for in Sec. 356.17 (b)(2), you may have to pay an additional amount, or we may have to pay an amount to you, as follows: (1) When we owe an amount to you. If the amount you paid is more than the settlement amount, we will refund the balance to you after the auction. This situation will generally be the case if you submit payment with your bids. A typical example would be an auction where the price is a discount from par and there is no accrued interest. (2) When you must remit an additional amount. If the settlement amount is more than the amount you paid, we will notify you of the additional amount due, which you will be responsible for remitting immediately. You may owe us such an additional amount if the auction calculations result in a premium or if accrued interest or an inflation adjustment is due.
Subpart DMiscellaneous Provisions
Sec. 356.30 When does the Treasury pay principal and interest on securities?
(a) General. We will pay principal on bills, notes, and bonds on the maturity date as specified in the auction announcement. Interest on bills consists of the difference between the discounted amount paid by the investor at original issue and the par value we pay to the investor at maturity. Interest on notes and bonds accrues from the dated date. Interest is payable on a semiannual basis on the interest payment dates specified in the auction announcement through the maturity date. If any principal or interest payment date is a Saturday, Sunday, or other day on which the Federal Reserve System is not open for business, we will make the payment (without additional interest) on the next business day. If a bond is callable, we will pay the principal prior to maturity if we call it under its terms, which include providing appropriate public notice.
(b) Treasury inflationprotected securities. (1) This table explains the amount that we will pay to holders of inflationprotected securities at maturity.
At maturity, if . . . Then . . . (i) the inflationadjusted principal is we will pay the inflation equal to or more than the par amount adjusted principal. of the security.
(ii) the inflationadjusted principal we will pay an additional is less than the par amount of the amount so that the additional security, and the security has not amount plus the inflation been stripped. adjusted principal equals the par amount.
(iii) the inflationadjusted principal to holders of principal is less than the par amount of the components only we will pay an security, and the security has been additional amount so that the stripped. additional amount plus the inflationadjusted principal equals the par amount. [[Page 74303]]
(2) Regardless of whether or not we pay an additional amount, we will base the final interest payment on the inflationadjusted principal at maturity.
(c) Discharge of payment obligations.
(1) The commercial bookentry system. We discharge our payment obligations when we credit payment to the account maintained at a Federal Reserve Bank for a depository institution or other authorized entity, or when we make payment according to the instructions of the person or entity maintaining the account. Further, we do not have any obligations to any person or entity that does not have an account with a Federal Reserve Bank. We also will not recognize the claims of any person or entity:
(i) That does not have an account at a Federal Reserve Bank, or (ii) With respect to any accounts not maintained at a Federal Reserve Bank.
(2) TreasuryDirect. We discharge our payment obligations when we make payment to a depository institution for credit to the account specified by the owner of the security, or when we make payment according to the instructions of the security's owner or the owner's legal representative.
Sec. 356.31 How does the STRIPS program work?
(a) General. Notes or bonds may be ``stripped''divided into separate principal and interest components. These components must be maintained in the commercial bookentry system. Stripping is done at the option of the holder, and may occur at any time from issuance until maturity. We provide the CUSIP numbers and payment dates for the principal and interest components in auction announcements and on our Web site at http://www.publicdebt.treas.gov. (b) Treasury fixedprincipal securities (notes and bonds other than Treasury inflationprotected securities(1) Minimum par amounts required for STRIPS. The minimum par amount of a fixedprincipal security that may be stripped is $1,000. Any par amount to be stripped above $1,000 must be in a multiple of $1,000.
(2) Principal components. Principal components stripped from fixed principal securities are maintained in accounts, and transferred, at their par amount. They have a CUSIP number that is different from the CUSIP number of the fully constituted (unstripped) security. (3) Interest components. Interest components stripped from fixed principal securities have the following features:
(i) They are maintained in accounts, and transferred, at their original payment value, which is derived by multiplying the semiannual interest rate and the par amount;
(ii) Their interest payment date becomes the maturity date for the component;
(iii) All interest components with the same maturity date have the same CUSIP number, regardless of the underlying security from which the interest payments were stripped, and therefore are fungible (interchangable).
(iv) The CUSIP numbers of interest components are different from the CUSIP numbers of principal components and fully constituted securities, even if they have the same maturity date, and therefore are not fungible.
(c) Treasury inflationprotected securities(1) Minimum par amounts required for STRIPS. The minimum par amount of an inflation protected security that may be stripped is $1,000. Any par amount to be stripped above $1,000 must be in a multiple of $1,000.
(2) Principal components. Principal components stripped from inflationprotected securities are maintained in accounts, and transferred, at their par amount. At

FOR FURTHER INFORMATION CONTACT Lori Santamorena (Executive Director) or Chuck Andreatta (Associate Director), Bureau of the Public Debt, Government Securities Regulations Staff, (202) 6913632 or email us at govsecreg@bpd.treas.gov.