[Federal Register Volume 61, Number 43 (Monday, March 4, 1996)]
[Proposed Rules]
[Pages 8420-8430]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-4481]




[[Page 8419]]

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Part IV





Department of the Treasury





_______________________________________________________________________



Fiscal Service



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31 CFR Part 357



Regulations Governing Book-Entry Treasury Bonds, Notes, and Bills; 
Proposed Rule

  Federal Register / Vol. 61, No. 43 / Monday, March 4, 1996 / Proposed 
Rules  

[[Page 8420]]


DEPARTMENT OF THE TREASURY

Fiscal Service

31 CFR Part 357

[Department of the Treasury Circular, Public Debt Series, No. 2-86]


Regulations Governing Book-Entry Treasury Bonds, Notes, and Bills

AGENCY: Bureau of the Public Debt, Fiscal Service, Treasury.

ACTION: Proposed rule.

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SUMMARY: Treasury is proposing regulations that will govern Treasury 
bonds, notes, and bills (marketable Treasury securities) in book-entry 
form held in the commercial book-entry system. The rules incorporate 
recent and significant changes in commercial and property law 
addressing the holdings of securities through financial intermediaries. 
The proposed rules would replace existing Treasury regulations that 
contain outdated legal concepts.

DATES: Comments must be submitted on or before May 3, 1996.

ADDRESSES: Send comments to the Office of the Chief Counsel, Bureau of 
the Public Debt, Room 503, E Street Building, Washington, DC 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, NW, Washington, DC 20220.

FOR FURTHER INFORMATION CONTACT: Walter T. Eccard, Chief Counsel (202) 
219-3320, or Cynthia E. Reese, Deputy Chief Counsel, (202) 219-3320.

SUPPLEMENTARY INFORMATION:

I. Introduction

    Treasury is reproposing rules for the Treasury/Reserve Automated 
Debt Entry System (``TRADES''). The adoption of TRADES is the 
culmination of a 27-year Treasury process of moving from issuing 
securities only in definitive (physical/certificated/paper) form to 
issuing marketable securities exclusively in book-entry form.
    Some numbers help put the scope of this process in perspective. In 
1967, the year before Treasury issued its first book-entry security, 
there were $211 billion of marketable Treasury securities outstanding--
all in definitive form. As of December 31, 1995, there were 
approximately $3.3 trillion of marketable Treasury securities 
outstanding (not counting Treasury securities held by various 
government trust funds), 99.7% of which were in book-entry form.
    Treasury had considered the potential benefits of converting from 
definitive securities to securities in book-entry form at various times 
since as early as 1940. In 1964, following substantial losses of 
definitive securities, Treasury and the Federal Reserve Banks began a 
four-year study of the practical and legal aspects of initiating a 
book-entry system.
    As a culmination of this study, the first Treasury book-entry 
securities regulations were issued effective January 1, 1968.1 
Securities converted to book-entry form pursuant to these regulations 
consisted of marketable Treasury securities held by Federal Reserve 
Banks that were either held as collateral pledges to the United States 
or represented proprietary holdings of member banks. The Federal 
Reserve Banks, which already acted as Treasury's fiscal agent with 
respect to transactions in definitive U.S. securities, began to act in 
that capacity with respect to Treasury's book-entry securities as well.

    \1\  32 FR 15672 (November 14, 1967).
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    During the following year, the then applicable regulations were 
revised to extend the book-entry system to Treasury securities held by 
the Federal Reserve Banks that were pledged to third parties, such as 
courts or other public officials, for the performance of certain 
obligations or to secure deposits of public funds. The book-entry 
conversion authority initiated in 1968 and 1969 allowed the Federal 
Reserve Banks to reduce both the increasing volume of definitive 
securities stored in their vaults and the risk of loss. Studies were 
undertaken at that time to determine the feasibility of expanding the 
system to include other Treasury securities not initially eligible for 
the Treasury book-entry system.
    In 1971, Treasury regulations were further revised to allow for all 
marketable Treasury securities to be held in book-entry form.2 The 
regulations permitted member banks to place in book-entry form 
securities held for customers, including those of dealers. Pursuant to 
these regulations, holding marketable Treasury securities in book-entry 
form was optional and book-entry securities could be converted to 
definitive form.

    \2\  35 FR 20001 (December 31, 1970) and 36 FR 6749 (April 18, 
1971).
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    Issuance of these regulations was significant in several respects. 
They were a key factor in averting a crisis in the government 
securities market. At that time, banks, brokers and dealers were being 
threatened with cancellation of insurance coverage because of large 
losses resulting from the theft of definitive securities. The dramatic 
increase in thefts and losses of government securities during the late 
1960's ($30 million in 1969 and again in 1970) required Treasury to 
obtain new legislation and implement new claims procedures to grant 
relief to claimants through replacement of lost or stolen securities 
prior to maturity.3 At the close of fiscal year 1971, about $230 
billion of marketable Treasury securities were outstanding and about 
$125 billion of that amount was in book-entry form.

    \3\ Pub. L. No. 92-19, May 27, 1971, 85 Stat. 74.
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    This initial success led to Treasury's decision to expand its 
efforts to move toward a complete book-entry system. A Treasury and 
Federal Reserve Bank task force was formed in 1976 to plan for the 
expansion of the book-entry system for issuing Treasury securities. The 
goal of the task force was to eliminate the issuance of definitive 
securities in all new marketable Treasury offerings, with an overall 
purpose of reducing paperwork, protecting against loss, theft, and 
counterfeiting, and reducing printing costs. The task force planned for 
a timed phase-out of the issuance of all definitive securities, 
beginning in late 1976.
    In December 1976, with the promulgation of new regulations,4 
Treasury took the first step towards an exclusive book-entry 
environment by offering Treasury bills only in that form, phasing in 
this change for the various bill maturities. A 52-week bill issue in 
December 1976 became the first offering of securities exclusively in 
book-entry form. Use of book entry was expanded to include 26-week 
bills in June 1977 and 13-week bills in September 1977.

    \4\ 41 FR 5335 (December 6, 1976).
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    Also, beginning in December 1976, Treasury, for the first time, 
began to provide book-entry accounts for investors who did not choose 
to hold their book-entry securities accounts at financial institutions 
or dealers. As of September 30, 1977, Treasury maintained 6,690 book-
entry accounts holding a total $182 million of Treasury bills. These 
accounts were the predecessor to the current TREASURY DIRECT 
system,5 which was established in 1986. Treasury notes and bonds 
were issued in book-entry only form beginning in August 1986, upon 
implementation of the TREASURY 

[[Page 8421]]
DIRECT system pursuant to new Treasury regulations.6

    \5\ TREASURY DIRECT is a system in which persons purchasing or 
already owning marketable Treasury securities may hold such 
securities directly with the Treasury in book-entry accounts 
maintained in their names. As of December 31, 1995, there were 
922,397 accounts holding $85.3 billion of marketable Treasury book-
entry securities.
    \6\ 31 CFR Part 357, Subpart C.
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    With the issuance of these regulations, all original issues of 
marketable Treasury securities (bills, notes, and bonds) were required 
to be in book-entry form. Book-entry holdings in Treasury securities 
have increased dramatically since that time. The following chart 
illustrates this rapid increase.

                Total Marketable Securities Outstanding 7               
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                                                              Percent in
                            Year                              book-entry
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June 1965...................................................         0  
August 1976.................................................        82  
August 1982.................................................        95.6
August 1986.................................................        97.2
December 1995...............................................        99.7
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7 Exclusive of securities held in various government trust funds.       

    Adoption of the TRADES regulations, to govern the commercial book-
entry system counterpart to TREASURY DIRECT, will mark a major step in 
the evolution of Treasury's full book-entry securities project by 
providing a clearer legal framework for all commercially-maintained 
marketable Treasury book-entry securities.

II. Legal Development

    As Treasury began to issue securities in book-entry form, it 
confronted a legal landscape that did not provide a framework for 
describing how such securities should be treated. As described by 
Professor James Rogers, the reporter for the drafting committee that 
produced Revised Article 8, Investment Securities of the Uniform 
Commercial Code (UCC), adopted by the American Law Institute (``ALI'') 
and the National Conference of Commissioners on Uniform State Laws 
(``NCCUSL'') in 1994 (``Revised Article 8''), the version of Article 8 
in effect in the late 1960s and early 1970s ``* * * was based on the 
assumption that possession and delivery of physical certificates are 
the key elements in the securities holding system.'' 8 Those 
assumptions, however, did not fit the commercial reality of marketable 
Treasury book-entry securities.

    \8\ James Steven Rogers, Boston College Law School, Reporter, 
Drafting Committee to Revise U.C.C. Article 8 Investment Securities, 
Prefatory Note, page 1, U.C.C. Article 8 (1994 official text with 
comments), hereinafter ``Prefatory Note.''
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    As noted above, beginning in 1968, Treasury began to promulgate 
regulations for its marketable securities held in book-entry form. 
These regulations provided, for the first time, a legal framework for 
treating marketable book-entry securities issued by Treasury. These 
regulations, particularly those adopted in 1971, contained several 
important innovations. First, they described transfers of interests in 
securities by means other than by moving paper certificates.9 As 
currently set forth in the regulations,10 a transfer of a 
marketable Treasury book-entry security occurs when a Federal Reserve 
Bank makes an entry in its records. Second, the regulations implicitly 
acknowledged that interests in marketable Treasury book-entry 
securities held in the commercial book-entry system were held in a 
tiered system.11

    \9\ UCC Sec. 8-320, added in 1962, provided for transfers within 
a central depository system by the making of appropriate entries on 
the books of a clearing corporation. Unlike the Treasury regulatory 
formulation, this UCC provision originally contemplated the deposit 
of paper certificates with the depository.
    \10\ 31 CFR 306.118(a).
    \11\ 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 institutions' customers may 
maintain accounts for their customers. This creates a tiered chain 
of custodial relationships. Thus, there frequently are multiple 
levels between the issuer of the security and the ultimate holder of 
the beneficial interest in that security.
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    Specifically, the regulations developed by Treasury had rules for 
transfers both at the level of institutions having accounts at a 
Federal Reserve Bank and rules for transfers at custodial levels below 
that level. These were significant innovations.
    The regulations developed by Treasury to describe the nature of a 
book-entry security, however, also deemed such security to be the 
equivalent of a bearer-definitive security. This bearer-definitive 
security fiction, as it came to be known, had the advantage of 
simplicity. It was also, at the time of its adoption, a useful concept 
that allowed for the application of existing law at a time when holding 
securities in book-entry form was a new development. Ultimately, 
however, the bearer- definitive fiction proved to be unsatisfactory 
because the attempt to graft the rules of certificated securities onto 
book-entry securities left too many questions unanswered.12 This 
uncertainty poses risks in the event of systemic failure.13 TRADES 
is designed to ameliorate these risks.

    \12\ These uncertainties are well described in Charles W. 
Mooney, Jr., ``Beyond Negotiability: A New Model for Transfer and 
Pledge of Interests in Securities Controlled by Intermediaries,'' 12 
Cardozo L. Rev. 305 (1990) (hereinafter ``Beyond Negotiability'').
    \13\ ``What led to the revision of Revised Article 8 is not 
intermediary risk itself, that is, the risk that customers of a 
failed intermediary might suffer loss, but systemic risk, that is, 
the risk that a failure of one security firm might cause others to 
fail.'' Rogers, supra, memorandum accompanying U.C.C. Revised 
Article 8, (1994 official text with comments), ``Revised U.C.C. 
Article 8--Why it's Needed--What it Does.''
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    In 1978 the existing UCC Article 8 was amended and, as part of that 
process, there was an attempt to provide some guidance on the treatment 
of book-entry securities. That attempt did not provide sufficient 
guidance for a tiered system of ownership such as the one that exists 
for Treasury securities because the rules of that version of Article 8 
``were based on the assumption that changes in ownership of securities 
would be effected by delivery of physical certificates or by 
registration of transfer on the books of the issuer.'' 14 In the 
Treasury system that assumption was not correct. A second level of 
confusion was created because the Treasury regulations continued to 
rely on the bearer- definitive fiction but referenced state law (which 
for most states included the 1978 revision to Article 8). Thus, there 
was lack of clarity as to how the 1978 amendments to Article 8 and the 
bearer-definitive fiction interacted and how interests at levels below 
a Federal Reserve Bank were to be treated.15

    \14\ Rogers, supra, U.C.C. Revised Article 8, Prefatory Note, 
page 4.
    \15\ Mooney, Beyond Negotiability, supra, pp. 345-350.
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    By 1984 Treasury had concluded that it needed to change its 
existing book-entry regulations. Several events buttressed that 
conclusion. As described above, the outstanding amount of marketable 
Treasury book-entry securities increased dramatically. In 1984 
representatives of a number of financial institutions brought to 
Treasury's attention the need for certainty in the market and raised a 
number of questions about the existing regulations that they believed 
undermined that certainty. With the growth of the size of the Treasury 
market came an increase in the need for, and the use of, short-term 
financing techniques, such as repurchase transactions, structured to be 
low risk. In order to preserve the liquidity of this most liquid of 
markets, it was critical that participants be able to settle their 
transactions quickly with a high degree of certainty.
    Disruptions in the market caused by the failure of some government 
securities broker-dealers further 

[[Page 8422]]
underscored the need for certainty in the minds of market participants. 
Events post-1984, such as the 1987 market break and the failure of 
Drexel Burnham, Lambert validated the concern that lack of certainty, 
given the magnitude of the dollars involved, posed serious systemic 
risks--both to the market for Treasury securities and all financial 
markets.16 More recently, there has been reaffirmation of the 
importance of certainty for transactions involving book-entry 
securities. In a March 3, 1995 speech, Alan Greenspan, Chairman of the 
Board of Governors of the Federal Reserve System, stated, ``* * * my 
experience with financial crises has convinced me that the greatest 
threat to the liquidity of our financial markets is the potential for 
disturbance to the clearance and settlement process for financial 
transactions.'' He went on to note, ``The most important set of 
concerns relates to the legal and institutional foundations of book 
entry settlement systems.'' 17

    \16\ As set forth in the May 1988 Interim Report of the Working 
Group on Financial Markets, ``the laws of the various states do not 
have uniform requirements for * * * transfers and pledges of 
certificated and uncertificated stocks * * * investors, market 
professionals and their lenders should have a single, clear set of 
rules for the transfer and pledge of securities similar to those 
being developed by the United States Treasury.'' The working group 
consisted of the chairpersons of the Board of Governors of the 
Federal Reserve System, the Securities and Exchange Commission and 
the Commodity Futures Trading Commission and the Department of the 
Treasury Under Secretary for Finance.
    \17\ Remarks by Alan Greenspan at the Financial Markets 
Conference of the Federal Reserve Bank of Atlanta, Coral Gables, 
Florida, March 3, 1995.
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III. Previous Trades Proposals

    In 1985 Treasury began the process of revising its book-entry 
security regulations. Treasury recognized early on that the process 
would be quite complicated.
    For reasons already explained, the first decision made in the 
initial proposal of the TRADES regulations 18 was to eliminate the 
bearer-definitive fiction. This proposed elimination, however, 
presented two major difficulties in determining what should replace the 
bearer-definitive fiction. First, state law was not uniform. In 1986 
all states had not adopted the 1978 version of UCC Article 8. Because 
of this lack of uniformity, Treasury determined that for purposes of 
clarity and certainty, the basic mechanical rules for transfer and 
pledge of marketable Treasury book-entry securities needed to be set 
out in the Federal regulations.

    \18\ 51 FR 8846 (March 14, 1986).
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    The second difficulty was that the provisions in the 1978 version 
of Article 8 could not be used as a model for the TRADES rules without 
significant modifications to fit the Treasury book-entry system. As a 
consequence, although this first proposal was based on provisions of 
the 1978 version of Article 8, there were some significant 
modifications. Treasury's goal was to clarify the rules for marketable 
Treasury book-entry securities to the extent possible without causing 
unnecessary changes in market practice.
    The most problematic issue raised in the March 1986 proposal, 
however, was the resolution of competing claims to interests in the 
same securities when held through intermediaries (``book-entry 
custodians,'' now referred to as ``Securities Intermediaries''). In 
other words, under some circumstances (particularly in scenarios 
involving failures of intermediaries), more than one person (e.g., 
owner or secured creditor) could claim entitlement to a Treasury 
security. How should such disputes be sorted out? After considering 
several different alternatives to deal with this issue, all of which 
had some disadvantages, the initial proposal of TRADES left the 
resolution of questions involving competing claims to state law.
    Comments on the first TRADES proposal were wide-ranging in their 
content and helpful. Most of the detailed comments dealt with the issue 
of competing claims and urged some form of bona fide purchaser rule 
(providing that an innocent purchaser would take a security free of 
prior adverse claims) and some form of a priority clearing lien for 
entities that perform the critical function of extending credit as a 
part of a clearing function in the government securities market. These 
and other new areas suggested by commenters were added to the second 
regulatory proposal published in November 1986.19

    \19\ 51 FR 43027 (November 28, 1986).
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    Another difficult issue that was raised in the TRADES rulemaking 
was the interaction between Federal and State law and the extent to 
which the Federal regulations should preempt State law. The opinions of 
the commentators on this point varied. The preamble to the second 
TRADES proposal in November, 1986 noted that:

    * * * With respect to book-entry securities, there is not an 
accepted body of principles [uniform state laws] that operates to 
provide predictable results * * * Even where such rules [the 1978 
UCC Article 8] have been adopted, some of the litigation arising 
from recent failures of government securities dealers suggests that 
important legal issues are yet to be resolved that stem from some of 
the concepts and relationships that arise where interests in 
securities are transferred without the transfer of a 
certificate.19a

    \19a\ 51 FR 43029 (November 28, 1986).

Because of the difficulties in drawing lines between coverage of 
Federal and State law, the November 1986 proposal adopted an approach 
of complete preemption of State law. Like the first TRADES proposal, 
the second proposal generated a large volume of detailed and helpful 
comments.
    Another significant development that had an impact on the TRADES 
rulemaking was the passage, at about the time the November 1986 
proposal was issued, of the Government Securities Act of 1986 
(``GSA'').19b The GSA granted Treasury rulemaking authority over 
the government securities market, including custodial holding of 
government securities. It also required the registration of government 
securities brokers and dealers for the first time and imposed a 
regulatory framework that had not previously existed for those 
entities. Treasury exercised its authority by promulgating rules in 
July 1987 in the areas of financial responsibility, protection of 
investor securities and balances, recordkeeping, and reporting and 
audit. In addition, the GSA rules imposed, for the first time, 
standards for the safeguarding and use of government securities by 
depository institutions that hold such obligations in custody for the 
account of customers. This new regulatory framework addressed many of 
the practices that had been involved in dealer failures and increased 
customer protection for securities held in the commercial book-entry 
system. It also provided, for the first time, comprehensive Federal 
regulation of the custody practices for government securities.

    \19b\  Pub. L. No. 99-571, October 28, 1986, 100 Stat. 3208.
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    In the next few years, other groups also explored many of the same 
issues raised in the proposed TRADES regulations. In 1988, in response 
to concerns raised about securities clearance and settlement as a 
result of the stock market break of 1987, the American Bar Association 
established an Advisory Committee on Settlement of Market Transactions. 
In addition, the Market Transactions Advisory Committee was established 
by the Securities and Exchange Commission under the Market Reform Act 
of 1990. Finally, and most significantly, a major effort to revise 
existing Article 8 commenced in 1991.
    Under the aegis of the ALI and NCCUSL, a group of scholars and 

[[Page 8423]]
    practitioners began work on a multi-year process that by 1994 produced 
Revised UCC Article 8. The importance of their work cannot be 
overstated. Representatives of Treasury, the Federal Reserve Banks and 
the Federal Reserve Board participated in virtually all of their 
drafting sessions. It soon became obvious that the drafters of Revised 
Article 8 were dealing with many of the issues that Treasury had 
considered in its earlier versions of TRADES, including the difficult 
questions involving the resolution of competing claims. While Treasury 
continued to work on TRADES and produced a third draft in 1992, 
Treasury ultimately concluded that it made sense to wait for work to be 
completed on Revised Article 8 so that Treasury would have the benefit 
of their final product.19c Treasury believes that decision was 
prudent.

    \19c\ The third TRADES proposal was published in April 1992 (57 
FR 12244, April 9, 1992). In response to the comments on the second 
proposal, Treasury reexamined and articulated the Federal interest 
in the regulations. That interest was described as ``to provide that 
degree of certainty in the law that is needed by participants in the 
Government securities market to facilitate transactions in book-
entry securities and to assure the continued liquidity and 
efficiency of the market.'' In that proposal, the extent of Federal 
preemption was cut back from the prior proposal, and some areas that 
had been included in prior proposals (e.g., warranties) were left to 
state law. The 1992 proposal retained provisions dealing with 
competing claims, while recognizing that the examination of legal 
principles in this area was continuing. The overall content of the 
rules, however, was not significantly different from the prior two 
proposals. Commenters to this third proposal urged Treasury to 
suspend its efforts and await the completion of the Revised Article 
8 project. On November 12, 1993, Treasury agreed to that suggestion. 
(58 FR 59972, November 12, 1993).
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    The many difficult issues resolved by the drafters of Revised 
Article 8 have been of significant benefit to Treasury as it has worked 
on this proposal for TRADES. Based on its participation in the many 
drafting sessions that produced Revised Article 8, and after a detailed 
study, Treasury has concluded that Revised Article 8 represents a major 
advance in commercial law. For the first time, there is a comprehensive 
set of rules to govern the modern book-entry systems. Treasury agrees 
with Professor Rogers when he notes that, ``The present version of 
Article 8 [the 1978 version], which is based on legal concepts adopted 
to the paper-based systems of the past, is not adequate to that task in 
the modern world of computerized recordkeeping and global securities 
trading.'' 20 Accordingly, as set forth in detail below, Treasury 
has concluded that it is appropriate to rely on Revised Article 8 in a 
significant way in this proposal for TRADES.21

    \20\ Letter from James Rogers, Reporter, Drafting Committee to 
Revise U.C.C. Article 8, to James Wong, Chief Consultant, 
(California) Senate Judiciary Committee (April 10, 1995).
    \21\ Copies of Article 8 are available upon request from the 
Bureau of the Public Debt's Public Affairs Officer, (202) 219-3302.
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IV. Comparison of Trades and Treasury Direct

    A person can hold interests in marketable Treasury book-entry 
securities either in TRADES 22 or TREASURY DIRECT. The following 
summarizes the major differences between the two systems.

    \22\ In TRADES a person's interest in a marketable Treasury 
book-entry security is a Security Entitlement. See the discussion at 
VI.D.4. below.
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    As previously described, persons holding marketable Treasury book-
entry securities in TRADES hold their interests in such securities in a 
tiered system of ownership accounts. In TRADES, Treasury, through its 
fiscal agents, the Federal Reserve Banks, knows the identity only of 
Participants (persons with a direct account relationship with a Federal 
Reserve Bank). While Participants may be beneficial owners of interests 
in marketable Treasury book-entry securities, there are many beneficial 
owners of such interests that are not Participants. Such beneficial 
owners hold their interests through one or more Securities 
Intermediaries such as banks, brokerage firms or securities clearing 
organizations.
    The rights of non-Participant beneficial owners can be exercised 
only through Securities Intermediaries. Neither Treasury nor the 
Federal Reserve Banks have any obligations to a non-Participant 
beneficial owner of an interest in a marketable Treasury book-entry 
security. Two examples illustrate this principle. First, Federal 
Reserve Banks, as Treasury's fiscal agents, will act only on 
instructions of the Participant in whose Securities Account the 
marketable Treasury book-entry security is maintained in recording 
transfers of an interest in a marketable Treasury book-entry security. 
A beneficial owner of such an interest that is a non-Participant has no 
ability to direct a transfer on the books of a Federal Reserve Bank. 
Second, Treasury discharges its payment obligation with respect to a 
marketable Treasury book entry security when payment is credited to a 
Participant's account or paid in accordance with such Participant's 
instructions. Neither Treasury nor a Federal Reserve Bank has any 
payment obligation to a non-Participant beneficial owner of an interest 
in a marketable Treasury book-entry security. A non-Participant 
beneficial owner receives its payment when its Securities Intermediary 
credits such owner's account.
    Persons holding marketable Treasury book-entry securities in 
TREASURY DIRECT, on the other hand, hold their securities accounts on 
records maintained by Treasury through its fiscal agents, the Federal 
Reserve Banks. The primary characteristic of TREASURY DIRECT is a 
direct account relationship between the beneficial owner of a 
marketable Treasury book-entry security and Treasury. In TREASURY 
DIRECT, Treasury discharges its payment obligation when payment is 
credited to the depository institution specified by the beneficial 
owner of the marketable Treasury book-entry security. Unlike TRADES, 
TREASURY DIRECT does not provide a mechanism for the exchange of cash 
in a sales transaction, nor are pledges of marketable Treasury book-
entry securities generally recognized. Accordingly, TREASURY DIRECT is 
suited for persons who plan to hold their Treasury securities until 
maturity, and provides an alternative for investors who are concerned 
about holding securities through intermediaries and who do not wish to 
hold their interests in Treasury securities indirectly in TRADES.

V. Scope of Proposed Regulation

    Just as the scope of Revised Article 8 is limited,23 the scope 
of this regulation is limited. It is not a comprehensive codification 
of the law governing securities, transactions in securities or the law 
of contracts for the purchase or sale of securities. Similarly, it is 
not a codification of all laws that could affect a person's interest in 
a marketable Treasury book-entry security. For example, state laws 
regarding divorce or intestate succession could well affect which 
persons have rights in the interest in a marketable Treasury book-entry 
security. This regulation does not displace such laws--with the sole 
exception that such laws cannot affect either Treasury or the Federal 
Reserve Banks.

    \23\ Prefatory Note at 12.
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VI. Section by Section Analysis

A. Dual Book-Entry Systems

    Section 357.0 sets forth that Treasury provides two systems for 
maintaining marketable Treasury book-entry securities--TRADES and 
TREASURY DIRECT. Subpart A of Part 357 of 31 CFR contains general 
information about TRADES and TREASURY DIRECT. Subpart B will contain 
the TRADES 

[[Page 8424]]
regulations. Subpart C contains the TREASURY DIRECT regulations. 
Subpart D contains miscellaneous provisions. Thus, in its totality, 
Part 357 sets forth in one place the complete set of governing rules 
for marketable Treasury securities issued in book-entry form.

B. Effective Date

    Section 357.1 establishes the effective date for TRADES. Treasury 
contemplates that TRADES will apply to outstanding securities currently 
governed by 31 CFR Part 306, Subpart O. Conforming changes to Part 306 
will be made with the publication of TRADES in final form. Consistent 
with the approach set forth in Revised Article 8 (see Sec. 8-603 and 
the official comment thereto), on and after the effective date these 
regulations will apply to all transactions, including transactions 
commenced prior to the effective date.
    Treasury proposes that the effective date for TRADES will be 90 
days following the publication of TRADES in final form in the Federal 
Register. While TRADES is based in large part on Revised Article 8 that 
has received widespread attention in the financial community and 
already has been adopted in 13 states,24 Treasury is proposing 
that TRADES will become effective 90 days following publication of the 
final TRADES rule to ensure a smooth transition to TRADES. Such an 
effective date, when combined with TRADES being published in proposed 
form with a 60-day comment period, should provide sufficient time for 
an orderly transition to the new TRADES rules. Treasury specifically 
seeks comments on whether the proposed effective date of TRADES is 
sufficient to permit an orderly transition.

    \24\  As of January 1, 1996, those states are: Arizona, 
Arkansas, Idaho, Illinois, Indiana, Louisiana, Minnesota, Nebraska, 
Oklahoma, Oregon, Texas, Washington and West Virginia.
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C. Definitions

    Section 357.2 contains definitions for use in Subparts B and C. 
While most of the definitions are straightforward, four terms--
Participant, Entitlement Holder, Security Entitlement and Securities 
Intermediary--are critical to an understanding of the proposed TRADES 
regulations.
1. Participant
    A Participant is a person that has an account relationship in its 
name with a Federal Reserve Bank. Accordingly, the Federal Reserve Bank 
and Treasury know both the identity of the persons maintaining these 
accounts and the marketable Treasury book-entry securities held in 
these accounts.
2. Securities Intermediary
    Securities Intermediaries are persons (other than individuals, 
except as described below) that are in the business of holding 
interests in marketable Treasury book-entry securities for others. 
Participants can be, and usually are, Securities Intermediaries. In 
addition, entities such as clearing corporations, banks, brokers and 
dealers can be Securities Intermediaries in a single chain of ownership 
of a Treasury security. An individual, unless registered as a broker or 
dealer under the federal securities laws, cannot be a Securities 
Intermediary. As an illustration of a possible chain of ownership, in 
the following chart, the Federal Reserve Bank, Participant and Broker-
Dealer are all Securities Intermediaries.
Treasury
Federal Reserve Bank
Participant
Broker-Dealer
Individual Holder
3. Entitlement Holder
    An Entitlement Holder is any person for whom a Securities 
Intermediary holds an interest in a marketable Treasury book-entry 
security. In the above example Individual Holder, Broker-dealer and 
Participant are all Entitlement Holders. Thus, a person can be both a 
Securities Intermediary and an Entitlement Holder.
4. Security Entitlement
    A Security Entitlement is the interest that an Entitlement Holder 
has in a marketable Treasury book-entry security. In the example, 
Participant, Broker-Dealer and Individual Holder all hold Security 
Entitlements. The rights and property interests associated with a 
Security Entitlement of a Participant held on the books of a Federal 
Reserve Bank (``Participant's Security Entitlement'') are, however, 
different from the rights and property interests associated with other 
Security Entitlements. As provided in Section 357.10(a), Federal law 
defines the scope and nature of a Participant's Security Entitlement. 
While TRADES is based in large part on Revised Article 8, the meaning 
of Security Entitlement under federal law is different than under 
Revised Article 8. For example, Participants have a direct claim 
against the United States for interest and principal even though, under 
state law, an Entitlement Holder would only have a claim against its 
Securities Intermediary for such payment. To the extent not 
inconsistent with this regulation, the scope and nature of a Security 
Entitlement of an Entitlement Holder below the level of a Participant 
(Broker-dealer and Individual Holder in the example above), is defined 
by applicable state law, as determined pursuant to Section 357.11.

D. Law Governing the United States and Reserve Banks

    Section 357.10(a) provides that the rights and obligations of the 
United States and the Federal Reserve Banks (with one exception 
detailed below), with respect to both the TRADES system and marketable 
Treasury book-entry securities maintained in TRADES are governed solely 
and exclusively by Federal law. Thus, claims against the United States 
and Federal Reserve Banks of both Participants and all other persons 
with an interest (or claiming an interest) in a marketable Treasury 
book-entry security maintained in TRADES are governed by Federal law. 
Federal law is defined to include TRADES, the offering circulars 
pursuant to which the Treasury securities are sold, the offering 
announcements and Federal Reserve Bank Operating Circulars. Prior to 
March 1, 1993, the terms of each offering of marketable Treasury 
securities, except for Treasury bills, were set forth in an offering 
circular published in the Federal Register.25 Since March 1, 1993, 
all marketable Treasury book-entry securities have been offered 
pursuant to a uniform offering circular set forth at 31 CFR Part 356.

    \25\  Treasury bills were issued pursuant to one master offering 
circular (31 CFR Part 349, removed, and replaced by 31 CFR Part 356) 
effective March 1, 1993. (58 FR 412)
---------------------------------------------------------------------------

    While TRADES is based in large measure on Revised Article 8, a 
fundamental principle of these regulations (and a divergence from 
Revised Article 8) is that the obligations of the issuer (the United 
States) and the Federal Reserve Banks, as well as all claims with 
respect to TRADES or a marketable Treasury book-entry security against 
Treasury or a Federal Reserve Bank, are governed solely by Federal law. 
Thus, for example, those parts of Revised Article 8 that detail 
obligations of issuers (or their agents) of securities are not 
applicable to either the United States or Federal Reserve Banks. In 
addition, neither the United States nor Federal Reserve Banks have any 
obligations to persons holding their interests in a marketable Treasury 
book-entry security at levels below the level 

[[Page 8425]]
of a Participant or to any other person claiming an interest in a 
marketable Treasury book-entry security (with the limited exception set 
out in Section 357.12(c)(1)). Thus, there are no derivative rights 
against either the United States or the Federal Reserve Banks.
    Section 357.10(b) sets forth the law applicable with respect to 
security interests granted to Federal Reserve Banks. There are three 
possible ways that such security interests are granted. First, security 
interests granted to a Federal Reserve Bank by a Participant in which 
such Bank does not mark its books are governed by the law of the state 
in which the head office of the Federal Reserve Bank is located. If the 
state in which the head office of a Federal Reserve Bank is located has 
not adopted Revised Article 8, the law of such jurisdiction is deemed 
to include Revised Article 8. (See discussion of federal pre-emption 
below). Second, if a Federal Reserve Bank does not mark its books, a 
security interest granted by a non-Participant is governed by the law 
specified in the agreement with a Federal Reserve Bank. Third, if a 
Participant or non-Participant grants a Federal Reserve Bank a security 
interest and the Federal Reserve Bank marks its books, Section 
357.12(c)(1) governs.
    For purposes of applying the state law specified in Section 
357.10(b), Federal Reserve Banks are treated as clearing corporations. 
As a result, security interests granted under Section 357.12(c)(2) in 
favor of a Federal Reserve Bank have the same priority as security 
interests granted to other clearing corporations under state law.

E. Law Governing Other Interests

1. Law Governing the Rights and Obligation of Participants and Third 
Parties
    Section 357.11 is a choice of law rule. The substantive matters 
subject to this choice of law rule are set forth in Section 357.11(a). 
The matters set forth in Section 357.11(a) are meant to be coextensive 
with those matters covered by Revised Article 8 with respect to a 
person's interest in a marketable Treasury book-entry security (other 
than those related to a person's relationship to Treasury or a Federal 
Reserve Bank which are governed solely by federal law). For purposes of 
this choice of law rules, both Participants and Federal Reserve Banks 
are Securities Intermediaries.
    Section 357.11(b) adopts Revised Article 8's choice of law rule. 
Section 357.11(c) sets forth a special choice of law rule with respect 
to security interests perfected by filing. Generally, the law 
applicable to the Securities Intermediary will govern matters involving 
an interest in a book-entry security held through that intermediary. 
This approach is not followed with respect to security interests 
created by filing. In those cases, the law applicable to the debtor is 
the governing law. Since filing systems are based on the location of 
the debtor, this approach should reduce uncertainty and preserve the 
normal practice of searching records based on the debtor's 
location.26

    \26\ The substantive effect of filing is limited and applies 
only in states which have adopted Revised Article 8. Since the 
effect of filing is a unique state law matter, in this one area, 
Treasury has determined that possible lack of uniformity does not 
justify altering state law.
---------------------------------------------------------------------------

    Section 357.11(d) provides for the application of Revised Article 8 
if the choice of law analysis required by Section 357.11(b) results in 
the choice of the law of a jurisdiction that has not yet adopted 
Revised Article 8. This section also provides that, for purposes of 
applying state law, the Federal Reserve Banks are clearing corporations 
and Participants' interests in book-entry securities are Security 
Entitlements.
2. Limited Scope of Federal Preemption
    As noted above, in an earlier TRADES proposal Treasury contemplated 
adopting a comprehensive regulation governing the rights of all persons 
in marketable Treasury book-entry securities held in TRADES. Such an 
approach was proposed because Treasury believed that a uniform rule was 
necessary to preserve the efficiency and liquidity of the market for 
Treasury securities--the most liquid and efficient market in the world. 
Treasury believed then, and believes now, that the material rights of a 
holder in the United States of an interest in a Treasury security 
should not vary solely by virtue of such holder's geographic location 
or the location of the financial institution through which it holds its 
interest in Treasury securities. In light of Revised Article 8, 
Treasury has determined that it is possible to achieve this uniformity 
without developing an independent system of Federal commercial 
law.27 The questions inherent in a tiered system of ownership have 
been analyzed, and, in Treasury's view, satisfactorily addressed by 
Revised Article 8.

    \27\  As noted previously, the substantive scope of this 
regulation is limited.
---------------------------------------------------------------------------

    As of the date of this release, 13 states have adopted Revised 
Article 8 and Treasury understands that it will soon be adopted in 
additional states. As with all uniform laws, the adoption process takes 
several years. In order to assure uniformity, in light of the 
unavoidable delays in the state-by-state adoption process of Revised 
Article 8, Treasury is proposing a limited form of preemption. As 
provided in both Sections 357.10(c) and 357.11(d), if the choice of law 
rules set forth in TRADES would lead to the application of the law of a 
state that has not yet adopted Revised Article 8, TRADES will apply 
Revised Article 8 (with conforming and miscellaneous amendments to 
other Articles) in the form approved by the ALI and NCCUSL. Treasury 
expects that these provisions will be operative only during the state-
by state adoption process and would plan to amend TRADES to delete 
reference to these provisions once the adoption process has been 
completed.
    While Revised Article 8 is defined to mean the official text of 
Article 8 as approved by the ALI and NCCUSL, Treasury recognizes that 
states may make minor changes in that text when adopting Article 8. 
Treasury has concluded that minor changes should not prevent Revised 
Article 8, as adopted by a state, from being the appropriate law. In 
other words, if a state passes a version of Article 8 that is 
substantially identical to Revised Article 8, reference to Revised 
Article 8 (as defined) would no longer be required. This approach 
represents a significantly reduced form of preemption of state law from 
former versions of TRADES and preserves Treasury's preeminent interest 
in a uniform system of rules applicable to all holders of interests in 
marketable Treasury book-entry securities.

F. Obtaining an Interest in a Book-Entry Security

1. Creation of a Participant's Security Entitlement
    A Participant's interest in a marketable Treasury book-entry 
security is a Securities Entitlement. Section 357.12(a) provides that a 
Participant's Securities Entitlement is created when a Federal Reserve 
Bank indicates by book entry that a Book-entry Security has been 
credited to a Participant's Securities Account. Instead of the concept 
of initial credit and transfer of a marketable Treasury book-entry 
security, as set forth in the existing regulations, this proposal 
focuses on the creation of a Participant's Securities Entitlement and, 
in this way, is similar to Section 8-501 of Revised Article 8.
    The regulation focuses on the creation of a Participant's Security 
Entitlement because Security Entitlement is the term used to describe 
the Participant's interest in a marketable Treasury book-

[[Page 8426]]
entry security. Once a Participant obtains that interest, the 
regulation sets forth what that interest is. Thus, as provided in 
Section 357.10, federal law describes a Participant's rights against 
the United States and the Federal Reserve Bank where it maintains its 
Securities Account. To the extent not inconsistent with Section 357.10, 
Section 357.11 describes the applicable law to determine Participants' 
rights and obligations with respect to all other persons. Under these 
regulations, Participants can still transfer their interests in a 
marketable Treasury book-entry security as they do today--by issuing a 
Transfer Message to the Federal Reserve Bank where they hold such 
interest. Transfer of interests between Participants can occur by a 
Participant holding such interest issuing a Transfer Message. As a 
result of such message, the Federal Reserve Bank will make a book entry 
in favor of the receiving Participant (thereby creating a Security 
Entitlement in favor of such Participant) and also will make a book 
entry deleting the initiator Participant's interest in such marketable 
Treasury book-entry security (thereby eliminating that Participant's 
Security Entitlement). In addition, if authorized under applicable 
state law, Participants may enter into agreements with other 
Participants that, as to the Participants, constitute a transfer. Such 
action is without effect to either the United States or a Federal 
Reserve Bank.
2. Creation and Priority of a Security Interest

Security Interests of the United States.

    Section 357.12(b) provides that a security interest in favor of the 
United States has priority over the interests of any other person in a 
marketable Treasury book-entry security. The United States obtains 
security interests in Treasury securities as collateral to secure funds 
in a variety of situations such as Treasury Tax and Loan accounts; 
government agency funds or funds under the control of the Federal 
Courts held at financial institutions; and securities pledged in lieu 
of surety by contractors and others. The priority provided the United 
States in these situations is consistent with existing law.
    In addition, Federal Reserve Banks do recognize on their books and 
records security interests in favor of the United States. In that 
situation, the Federal Reserve Bank will not transfer the security 
without the permission of the United States. This section provides that 
a Federal Reserve Bank may rely exclusively on the directions of an 
authorized representative of the United States to transfer a security 
and is protected in so relying.

Security Interests on the Books of a Reserve Bank

    In a limited number of situations, Federal Reserve Banks will agree 
to record a security interest on their books. It is important to note 
that there is no obligation for either Treasury or a Federal Reserve 
Bank to agree to record a security interest on the books of a Federal 
Reserve Bank. If they do so, the security interest is perfected when 
the Federal Reserve Bank records a security interest on its books. In 
addition, the security interest has priority over all other interests 
in the marketable Treasury book-entry security except an interest of 
the United States.

Other Security Interests

    As provided in Section 357.12(c)(2), Participants can create 
security interests in any manner authorized by applicable state 
law.\28\ The perfection and priority of such interests shall be 
governed by such applicable law. In applying such law, when a 
Participant grants a Federal Reserve Bank a security interest, the 
Federal Reserve Bank is treated as a clearing corporation.

    \28\ If the state has not yet adopted Revised Article 8, 
applicable state law would be Revised Article 8.
---------------------------------------------------------------------------

    If a person perfects a security interest pursuant to Section 
357.12(c)(2) obligations of the Treasury and the Federal Reserve Banks 
with respect to that security interest are limited. Specifically, 
unless special arrangements are agreed to by the United States or a 
Federal Reserve Bank pursuant to Section 357.12(c)(1), neither the 
Federal Reserve Bank nor the United States will recognize the interests 
of any person other than the person in whose securities account the 
interest in a marketable Treasury book-entry security is maintained. 
This does not mean that such a security interest is invalid. Rather, it 
means that the creditor's recourse will be solely against the debtor 
Participant or other third party.

G. Rights and Obligations of Treasury and the Reserve Banks

1. Adverse Claims
    Section 357.13(a) sets forth the general rule that, except as 
provided in Section 357.12(c)(1), Treasury and the Federal Reserve 
Banks will recognize only the interest of a Participant in a marketable 
Treasury book-entry security in whose Securities Account such interest 
is maintained.
    As noted previously, marketable Treasury book-entry securities 
maintained in TRADES are held in a tiered system of ownership. The 
records of a Federal Reserve Bank reflect only the ownership at the top 
tier. Institutions maintaining a Securities Account with a Federal 
Reserve Bank frequently will hold interests in marketable Treasury 
book-entry securities for their customers (which can include broker-
dealers and other Securities Intermediaries) and in certain cases those 
customers will hold interests in securities for their customers. 
Accordingly, neither Treasury nor a Federal Reserve Bank will know the 
identity or recognize a claim of a Participant's customer if that 
customer were to present it to Treasury or a Federal Reserve Bank.
    In addition, except as provided in Section 357.12(c)(1), neither 
the Treasury nor a Federal Reserve Bank will recognize the claims of 
any other person asserting a claim in a marketable Treasury book-entry 
security. Persons at levels below the Participant level must present 
their claims to their Securities Intermediary.
2. Payment Obligations
    Section 357.13(b) contains a corollary to the rule set forth in 
Section 357.13(a). This section provides that Treasury discharges its 
payment responsibility with respect to a security that it has issued 
when a Federal Reserve Bank credits the funds account of a Participant 
with amounts due on that security or makes payment in such other manner 
specified by the Participant. This is consistent with existing law and 
the first TRADES proposal.\29\ In Revised Article 8, the issuer 
discharges its obligations when it makes payment to an owner registered 
on its books. Under common commercial practice, the registered owner in 
the indirect system may be a clearing corporation or the clearing 
corporation's nominee. Unlike Revised Article 8, even though Federal 
Reserve Banks are deemed to be clearing corporations, Treasury remains 
liable until payment is made to a Participant. Section 357.13(b)(2) 
establishes the mechanism of how marketable Treasury book-entry 
securities are paid at maturity. This paragraph makes clear that such 
payment takes place automatically and that, unlike with physical 
certificates, there is no act of presentment required by the 
Participant.

    \29\ 51 FR 8846, 8848 (March 14, 1986).
---------------------------------------------------------------------------

H. Authority of Reserve Banks

    Section 357.14 provides that Federal Reserve Banks are authorized, 
as fiscal agents of Treasury, to operate the 

[[Page 8427]]
commercial book-entry system for Treasury.

I. Notices

    Section 357.44 contains a revised version of a provision that 
appeared in earlier TRADES proposals. Similar to the rule in Revised 
Article 8 (see Sec. 8-112), it provides where certain legal process 
should be directed. While providing instructions on where notice should 
be directed, it makes clear that the regulations do not establish 
whether a Federal Reserve Bank is required to honor any such order or 
notice.

VII. Procedural Requirements

    This proposed rule does not meet the criteria for a ``significant 
regulatory action'' pursuant to Executive Order 12866.
    Although this proposed rule is being issued in proposed form to 
secure the benefit of public comment, the notice and public comment 
procedures requirements of the Administrative Procedure Act are 
inapplicable, pursuant to 5 U.S.C. 553(a)(2).
    As no notice of proposed rulemaking is required, the provisions of 
the Regulatory Flexibility Act (5 U.S.C. 601, et seq.) do not apply.
    There are no collections of information contained in this proposed 
rule. Therefore, the Paperwork Reduction Act does not apply.

List of Subjects in 31 CFR Part 357

    Bonds, Electronic funds transfer, Federal Reserve System, 
Government securities, Securities.

    For the reasons set forth in the preamble, Title 31, Chapter II, 
Subchapter B, Part 357 is proposed to be amended as follows:

PART 357--[AMENDED]

    1. The authority citation for Part 357 continues to read as 
follows:

    Authority: 31 U.S.C. Chapter 31; 5 U.S.C. 301; 12 U.S.C. 391.

    2-3. Sections 357.0 and 357.1 are added to read as follows:


Sec. 357.0  Dual book-entry systems.

    (a) Treasury securities shall be maintained in either of the 
following two book-entry systems:
    (1) Treasury/Reserve Automated Debt Entry System (TRADES). A 
Treasury security is maintained in TRADES if it is credited by a 
Federal Reserve Bank to a Participant's Securities Account. See Subpart 
B for rules pertaining to TRADES.
    (2) TREASURY DIRECT Book-entry Securities System (TREASURY DIRECT). 
A Treasury security is maintained in TREASURY DIRECT if it is credited 
to a TREASURY DIRECT account as described in Section 357.20 of this 
Part. Such accounts may be accessed by investors in accordance with 
Subpart C through any Federal Reserve Bank or the Bureau of the Public 
Debt. See Subpart C for rules pertaining to TREASURY DIRECT.
    (b) A Treasury security eligible to be maintained in TREASURY 
DIRECT under the terms of its offering circular or pursuant to notice 
published by the Secretary may be transferred to or from an account in 
TRADES from or to an account in TREASURY DIRECT in accordance with 
Section 357.22(a).


Sec. 357.1  Effective date.

    Subpart B of this Part, and other changes made to this Part with 
the publication of Subpart B in final form, are effective on and after 
[insert date 90 calendar days after the date of publication in final 
form]. Subpart C and other provisions in this Part published in final 
form on May 16, 1986, or as amended prior to [insert date 90 calendar 
days after the date of publication in final form] (related to TREASURY 
DIRECT) remain in effect.


Sec. 357.3  [Redesignated and Sec. 357.2; amended]

    4. Section 357.3 is redesignated Sec. 357.2, the introductory text 
of the section is designated as paragraph (a) introductory text, the 
definition of security interest and pledge is removed, the definition 
of TRADES is revised, the remaining definitions are added in 
alphabetical order, and a new paragraph (b) is added to read as 
follows:


Sec. 357.2  Definitions.

    (a) * * *
* * * * *
    Book-entry Security means, in Subpart B, a Treasury Security 
maintained in TRADES and, in Subpart C, a Treasury Security maintained 
in TREASURY DIRECT.
* * * * *
    Entitlement Holder means a Person to whose account an interest in a 
Book-entry Security is credited on the records of a Securities 
Intermediary.
* * * * *
    Federal Reserve Bank Operating Circular means the uniform 
publication issued by each Federal Reserve Bank that sets forth the 
terms and conditions under which the Reserve Bank maintains Book-entry 
Securities accounts and transfers Book-entry Securities.
* * * * *
    Funds Account means a reserve and/or clearing account at a Federal 
Reserve Bank to which debits or credits are posted for transfers 
against payment, book-entry securities transaction fees, or principal 
and interest payments.
* * * * *
    Issue means a group of securities, as defined in this section, that 
is identified by the same CUSIP (Committee on Uniform Securities 
Identification Practices) number.
* * * * *
    Participant means a Person that maintains a Participant's 
Securities Account with a Federal Reserve Bank.

    Participant's Securities Account means an account in the name of a 
Participant at a Federal Reserve Bank to which Book-entry Securities 
held for a Participant are or may be credited.
    Person means and includes an individual, corporation, company, 
governmental entity, association, firm, partnership, trust, estate, and 
any other similar organization, but does not mean or include the United 
States or a Federal Reserve Bank.
* * * * *
    Revised Article 8 means Uniform Commercial Code, Revised Article 8, 
Investment Securities (with Conforming and Miscellaneous Amendments to 
Articles 1, 4, 5, 9, and 10) 1994 Official Text, as set forth in 
Appendix B of this part.
    Securities Intermediary means:
    (1) A Person that is registered as a ``clearing agency'' under the 
federal securities laws; a Federal Reserve Bank; any other person that 
provides clearance or settlement services with respect to a Book-entry 
Security that would require it to register as a clearing agency under 
the federal securities laws but for an exclusion or exemption from the 
registration requirement, if its activities as a clearing corporation, 
including promulgation of rules, are subject to regulation by a federal 
or state governmental authority; or
    (2) A Person (other than an individual, unless such individual is 
registered as a broker or dealer under the federal securities laws) 
including a bank or broker, that in the ordinary course of its business 
maintains securities accounts for others and is acting in that 
capacity.
    Security means a bill, note, or bond, each as defined in this 
section. It also means any other obligation issued by the Department 
that, by the terms of the applicable offering circular or announcement, 
is made subject to this Part. Solely for purposes of this Part, it also 
means:
    (1) the interest and principal components of a security eligible 
for Separate Trading of Registered Interest 

[[Page 8428]]
and Principal of Securities (``STRIPS''), if such security has been 
divided into such components as authorized by the express terms of the 
offering circular under which the security was issued and the 
components are maintained separately on the books of one or more 
Federal Reserve Banks; and
    (2) the interest coupons that have been converted to book-entry 
form under the Treasury's Coupons Under Book-Entry Safekeeping Program 
(``CUBES''), pursuant to agreement and the regulations in 31 CFR Part 
358.
    Security Entitlement means the rights and property interest of an 
Entitlement Holder with respect to a Book-entry Security.
* * * * *
    TRADES is the Treasury/Reserve Automated Debt Entry System, also 
referred to as the commercial book-entry system.
* * * * *
    Transfer Message means an instruction of a Participant to a Federal 
Reserve Bank to effect a transfer of a Book-entry Security maintained 
in TRADES, as set forth in Federal Reserve Bank Operating Circulars.
* * * * *
    (b) Unless the context requires otherwise, terms not defined in 
this section have the meanings as set forth in Revised Article 8.
    5. Subpart B, consisting of Sections 357.10 through 357.14, is 
added to read as follows:

Subpart B--Treasury/Reserve Automated Debt Entry System (TRADES)

357.10  Law governing rights and obligations of United States and 
Federal Reserve Banks; rights of any Person against United States 
and Federal Reserve Banks.
357.11  Law governing other interests.
157.12  Creation of Participant's Security Entitlement; security 
interests.
357.13  Obligations of United States; no adverse claims.
357.14  Authority of Federal Reserve Banks.

Subpart B--Treasury/Reserve Automated Debt Entry System (TRADES)


Sec. 357.10  Law governing rights and obligations of United States and 
Federal Reserve Banks; rights of any Person against United States and 
Federal Reserve Banks.

    (a) Except as provided in paragraph (b) of this section, the rights 
and obligations of the United States and the Federal Reserve Banks with 
respect to: a Book-entry Security or Security Entitlement and the 
operation of the Treasury book-entry system; and the rights of any 
Person, including a Participant, against the United States and the 
Federal Reserve Banks with respect to: a Book-entry Security or 
Security Entitlement and the operation of the Treasury book-entry 
system; are governed solely by Treasury regulations, including the 
regulations of this Part, the applicable offering circular (which is 31 
CFR Part 356, in the case of securities issued on and after March 1, 
1993), the announcement of the offering, and Federal Reserve Bank 
Operating Circulars.
    (b) A security interest granted to a Federal Reserve Bank, in the 
manner described in Section 357.12(c)(2), is governed by the law (not 
including the conflict-of-law rules) of the jurisdiction where the head 
office of the Federal Reserve Bank maintaining the Participant's 
Securities Account is located. For purposes of the application of such 
law, the Federal Reserve Bank shall be deemed a clearing corporation. A 
security interest granted to a Federal Reserve Bank by a Person that is 
not a Participant, is governed by the law specified in the agreement 
between the Federal Reserve Bank and the non-Participant.
    (c) If the jurisdiction specified in paragraph (b) of this section 
is a State or territory or possession of the United States that has not 
adopted Revised Article 8, then the law specified in paragraph (b) 
shall be Revised Article 8.


Sec. 357.11  Law governing other interests.

    (a) To the extent not inconsistent with these regulations, the law 
(not including the conflict-of-law rules) of a Securities 
Intermediary's jurisdiction governs:
    (1) the acquisition of a Security Entitlement from the Securities 
Intermediary;
    (2) the rights and duties of the Securities Intermediary and 
Entitlement Holder arising out of a Security Entitlement;
    (3) whether the Securities Intermediary owes any duties to an 
adverse claimant to a Security Entitlement;
    (4) whether an adverse claim can be asserted against a Person who 
acquires a Security Entitlement from the Securities Intermediary or a 
Person who purchases a Security Entitlement or interest therein from an 
Entitlement Holder; and
    (5) except as otherwise provided in paragraph (c), the perfection, 
effect of perfection or non-perfection and priority of a security 
interest in a Security Entitlement.
    (b) The following rules determine a ``Securities Intermediary's 
jurisdiction'' for purposes of this section:
    (1) If an agreement between the Securities Intermediary and its 
Entitlement Holder specifies that it is governed by the law of a 
particular jurisdiction, that jurisdiction is the Securities 
Intermediary's jurisdiction.
    (2) If an agreement between the Securities Intermediary and its 
Entitlement Holder does not specify the governing law as provided in 
paragraph (b)(1), but expressly specifies that the securities account 
is maintained at an office in a particular jurisdiction, that 
jurisdiction is the Securities Intermediary's jurisdiction.
    (3) If an agreement between the Securities Intermediary and its 
Entitlement Holder does not specify a jurisdiction as provided in 
paragraph (b)(1) or (b)(2), the Securities Intermediary's jurisdiction 
is the jurisdiction in which is located the office identified in an 
account statement as the office serving the Entitlement Holder's 
account.
    (4) If an agreement between the Securities Intermediary and its 
Entitlement Holder does not specify a jurisdiction as provided in 
paragraph (b)(1) or (b)(2) and an account statement does not identify 
an office serving the Entitlement Holder's account as provided in 
paragraph (b)(3), the Securities Intermediary's jurisdiction is the 
jurisdiction in which is located the chief executive office of the 
Securities Intermediary.
    (c) Notwithstanding the general rule in paragraph (a)(5) of this 
section, the law (but not the conflict-of-law rules) of the 
jurisdiction in which the Person creating a security interest is 
located governs whether such security interest may be perfected by 
filing a financing statement and the effect of perfection or 
nonperfection and priority of such security interest.
    (d) If the jurisdiction specified in paragraph (b) of this section 
is a State or territory or possession of the United States that has not 
adopted Revised Article 8, then the law for the matters specified in 
paragraph (a) of this section shall be Revised Article 8. For purposes 
of the application of the matters specified in paragraph (a) of this 
section, the Federal Reserve Bank maintaining the Securities Account 
shall be deemed a clearing corporation, and the Participant's interest 
in a Book-entry Security is a Security Entitlement.


Sec. 357.12  Creation of Participant's Security Entitlement; security 
interests.

    (a) A Participant's Security Entitlement is created when a Federal 

[[Page 8429]]
    Reserve Bank indicates by book entry that a Book-entry Security has 
been credited to a Participant's Securities Account.
    (b) A security interest in a Security Entitlement of a Participant 
in favor of the United States to secure deposits of public money, 
including without limitation deposits to the Treasury tax and loan 
accounts, or other security interest in favor of the United States that 
is required by Federal statute, regulation, or agreement, and that is 
marked on the books of a Federal Reserve Bank is thereby effected and 
perfected, and has priority over any other interest in the securities. 
Where a security interest in favor of the United States in a Security 
Entitlement of a Participant is marked on the books of a Federal 
Reserve Bank, the Reserve Bank may rely, and is protected in relying, 
exclusively on the order of an authorized representative of the United 
States directing the transfer of the security. For purposes of this 
paragraph, an ``authorized representative of the United States'' is the 
official designated in the applicable regulations or agreement to which 
a Federal Reserve Bank is a party, governing the security interest.
    (c)(1) The United States and the Federal Reserve Banks have no 
obligation to agree to act on behalf of any Person or to recognize the 
interest of any transferee of a security interest or other limited 
interest in favor of any Person except to the extent of any specific 
requirement of Federal law or regulation or to the extent set forth in 
any specific agreement with the Federal Reserve Bank on whose books the 
interest of the Participant is recorded. To the extent required by such 
law or regulation or set forth in an agreement with a Federal Reserve 
Bank, or the Federal Reserve Bank Operating Circular, a security 
interest in a Security Entitlement that is in favor of a Federal 
Reserve Bank or a Person may be created and perfected by a Federal 
Reserve Bank marking its books to record the security interest. Except 
as provided in paragraph (b) of this section, a security interest in a 
Security Entitlement marked on the books of a Federal Reserve Bank 
shall have priority over any other interest in the securities.
    (2) In addition to the method provided in paragraph (c)(1) of this 
section, a security interest, including a security interest in favor of 
a Federal Reserve Bank, may be perfected by any method by which a 
security interest may be perfected under applicable law as described in 
Section 357.10(b) or Section 357.11. The perfection, effect of 
perfection or non-perfection and priority of a security interest are 
governed by such applicable law. A security interest in favor of a 
Federal Reserve Bank shall be treated as a security interest in favor 
of a clearing corporation in all respects under such law, including 
with respect to the effect of perfection and priority of such security 
interest. A Federal Reserve Bank Operating Circular shall be treated as 
a rule adopted by a clearing corporation for such purposes.


Sec. 357.13  Obligations of United States; no adverse claims.

    (a) Except as provided in Section 357.12(b) and (c)(1), for the 
purposes of this Subpart B, the United States and the Federal Reserve 
Banks shall treat the Participant to whose Securities Account an 
interest in a Book-entry Security has been credited as the person 
exclusively entitled to issue a Transfer Message, to receive interest 
and other payments with respect thereof and otherwise to exercise all 
the rights and powers with respect to such Security, notwithstanding 
any information or notice to the contrary. Neither the Federal Reserve 
Banks nor Treasury is liable to a Person asserting or having an adverse 
claim to a Security Entitlement or to a Book-entry Security in a 
Participant's Securities Account, including any such claim arising as a 
result of the transfer or disposition of a Book-entry Security by a 
Federal Reserve Bank pursuant to a Transfer Message that the Federal 
Reserve Bank reasonably believes to be genuine.
    (b) The obligation of the United States to make payments of 
interest and principal with respect to Book-entry Securities is 
discharged at the time payment in the appropriate amount is made as 
follows:
    (1) Interest on Book-entry Securities is either credited by a 
Federal Reserve Bank to a Funds Account maintained at such Bank or 
otherwise paid as directed by the Participant.
    (2) Book-entry Securities are redeemed in accordance with their 
terms by a Federal Reserve Bank withdrawing the securities from the 
Participant's Securities Account in which they are maintained and by 
either crediting the amount of the redemption proceeds, including both 
principal and interest, where applicable, to a Funds Account at such 
Bank or otherwise paying such principal and interest as directed by the 
Participant. No action by the Participant is required in connection 
with the redemption of a Book-entry Security.


Sec. 357.14  Authority of Federal Reserve Banks.

    (a) Each Federal Reserve Bank is hereby authorized as fiscal agent 
of the United States to perform functions with respect to the issuance 
of Book-entry Securities offered and sold by the Department to which 
this Subpart applies, in accordance with the terms of the applicable 
offering circular and with procedures established by the Department; to 
service and maintain Book-entry Securities in accounts established for 
such purposes; to make payments of principal and interest, as directed 
by the Department; to effect transfer of Book-entry Securities between 
Participants' Securities Accounts as directed by the Participants; and 
to perform such other duties as fiscal agent as may be requested by the 
Department.
    (b) Each Federal Reserve Bank may issue Operating Circulars not 
inconsistent with this Part, governing the details of its handling of 
Book-entry Securities, Security Entitlements, and the operation of the 
book-entry system under this Part.
    6. In Subpart D, Section 357.41 is revised and the text of 
Secs. 357.42 and 357.44 are added, to read as follows:

Subpart D--Additional Provisions

* * * * *


Sec. 357.41  Waiver of regulations.

    The Secretary reserves the right, in the Secretary's discretion, to 
waive any provision(s) of these regulations in any case or class of 
cases for the convenience of the United States or in order to relieve 
any person(s) of unnecessary hardship, if such action is not 
inconsistent with law, does not adversely affect any substantial 
existing rights, and the Secretary is satisfied that such action will 
not subject the United States to any substantial expense or liability.


Sec. 357.42  Liability of Department and Federal Reserve Banks.

    The Department and the Federal Reserve Banks may rely on the 
information provided in a tender, transaction request form, or Transfer 
Message, and are not required to verify the information. The Department 
and the Federal Reserve Banks shall not be liable for any action taken 
in accordance with the information set out in a tender, transaction 
request form, or Transfer Message, or evidence submitted in support 
thereof.
* * * * * 

[[Page 8430]]



Sec. 357.44  Notice of attachment for securities in TRADES.

    The interest of a debtor in a Security Entitlement may be reached 
by a creditor only by legal process upon the Securities Intermediary 
with whom the debtor's securities account is maintained, except where a 
Security Entitlement is maintained in the name of a secured party, in 
which case the debtor's interest may be reached by legal process upon 
the secured party. These regulations do not purport to establish 
whether a Federal Reserve Bank is required to honor an order or other 
notice of attachment in any particular case or class of cases.
* * * * *
    7. Appendix B and Appendix C to Part 357 are added and reserved as 
follows:

Appendix B to Part 357--Revised Article 8 [Reserved]

Appendix C to Part 357--TRADES Commentary [Reserved]

    Dated: February 22, 1996.
Gerald Murphy,
Fiscal Assistant Secretary.
[FR Doc. 96-4481 Filed 3-1-96; 8:45 am]
BILLING CODE 4810-39-W