[Federal Register Volume 61, Number 145 (Friday, July 26, 1996)]
[Proposed Rules]
[Pages 39228-39240]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-19040]



[[Page 39227]]


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Part III





Department of the Treasury





_______________________________________________________________________



Fiscal Service



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31 CFR Part 344



United States Treasury Certificates of Indebtedness, Treasury Notes, 
and Treasury Bonds--State and Local Government Series; Proposed Rule





  Federal Register / Vol. 61, No. 145 / Friday, July 26, 1996 / 
Proposed Rules  

[[Page 39228]]



DEPARTMENT OF THE TREASURY

Fiscal Service

31 CFR Part 344

[Department of the Treasury Circular, Public Debt Series No. 3-72]


Regulations Governing United States Treasury Certificates of 
Indebtedness, Treasury Notes, and Treasury Bonds--State and Local 
Government Series

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

ACTION: Proposed rule.

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SUMMARY: The Department of the Treasury hereby publishes a proposed 
rule governing United States Treasury Certificates of Indebtedness, 
Notes, and Bonds of the State and Local Government Series (SLGS). These 
securities are available for purchase by issuers of state and local 
government bonds described in section 103 of the Internal Revenue Code 
for proceeds (or amounts treated as proceeds) which are subject to 
yield restrictions or arbitrage rebate requirements of the Income Tax 
regulations under sections 103, 148, 149 and 150 of the Internal 
Revenue Code (tax regulations). This document proposes changes to make 
the SLGS securities program more flexible.

DATES: Comments must be received on or before August 26, 1996.

ADDRESSES: Copies of this proposed rule have also been made available 
for downloading from the Bureau of the Public Debt home page at the 
following address:

http://www.ustreas.gov:treasury/bureaus/pubdebt/pubdebt.html

Comments should be sent to: Division of Special Investments, Bureau of 
the Public Debt, Department of the Treasury, 200 3rd St., P.O. Box 396, 
Parkersburg, WV 26101-0396. Comments received will be available for 
public inspection and downloading on the Internet and for inspection 
and copying at the Treasury Department Library, FOIA Collection, Room 
5030, Main Treasury Building, 1500 Pennsylvania Avenue NW, Washington, 
D.C. 20220. Persons wishing to visit the library should call 202-622-
0990 for an appointment. Comments may also be sent through the Internet 
to Fred Pyatt, Director, or Howard Stevens, Supervisory Program 
Analyst, Division of Special Investments at [email protected] or 
[email protected]. When sending comments by Internet, please 
provide your full name and mailing address.
FOR FURTHER INFORMATION CONTACT: Fred Pyatt, Director, or Howard 
Stevens, Supervisory Program Analyst, Division of Special Investments, 
at 304-480-7752 or Ed Gronseth, Deputy Chief Counsel, or Jim Kramer-
Wilt, Attorney/Adviser, Office of the Chief Counsel, at 304-480-5190.

SUPPLEMENTARY INFORMATION:

I. Background.

    The Department of the Treasury, Bureau of the Public Debt, is 
attempting to make the SLGS securities program more attractive and 
flexible for State and local government issuers of debt obligations 
that are subject to the arbitrage and rebate rules of the Internal 
Revenue Code. It is the Department's intent to do so in a manner 
consistent with tax policy objectives and in a manner that is cost 
effective.
    In recent years, market participants have advised the Department 
that aspects of the existing SLGS securities regulations impose burdens 
that are not needed or cost effective. On April 30, 1996, the 
Department published an Advanced Notice of Proposed Rulemaking, noting 
several changes the Department was considering in order to make the 
SLGS securities program more flexible. The changes under consideration 
were to: (1) Eliminate the ``all or nothing'' certification, (2) 
provide for subscriptions and redemptions in increments of less than 
$100 above the $1,000 minimum, (3) reduce the minimum maturity for zero 
interest certificates of indebtedness, (4) reduce the time for advance 
notice between subscription and issue date for time deposit and special 
zero interest SLGS securities, (5) make SLGS securities pricing more 
consistent with open market Treasury securities, (6) permit SLGS 
securities to be purchased with funds subject to rebate as well as 
yield restriction, (7) revise the demand deposit program, (8) change 
the formula for determining the redemption value of SLGS securities, 
including eliminating the restriction against premium redemption, (9) 
permit zero interest time deposit SLGS securities to be redeemed 
without penalty; and lastly, (10) permit the purchase of SLGS 
securities with the proceeds of previously redeemed SLGS securities or 
with open market Treasury securities.
    There were eight letters received commenting on the Advanced Notice 
of Proposed Rulemaking (ANPR). In general, the comments were in favor 
of the ten items contained in the ANPR. Several comments suggested 
specific parameters for some of the ten items while others suggested 
the Treasury Department consider changes not contained in the ANPR. 
Following is a summary of the issues addressed in the comments and an 
explanation of the action taken with respect to each comment.
    Proposal No. 1--The Department proposed the elimination of the 
``all or nothing'' certification which requires all yield restricted 
investments be invested either all in SLGS securities or all in open 
market Treasury securities. All comments were strongly in favor of the 
elimination of the ``all or nothing'' certification. The Department has 
included this proposal in the proposed rule.
    Proposal No. 2--The Department proposed to allow subscriptions for 
time deposit SLGS securities in increments of less than $100 above the 
$1,000 minimum investment and to permit partial redemptions in 
increments of less than $100, so long as an account balance is at least 
$1,000 after partial redemption. Most comments were in favor of these 
items. One comment stated there would be an increased administrative 
burden on agent banks and on the Department. The Department has 
determined to make these changes which would result in a more flexible 
program. Please refer to the comment on the elimination of the special 
zero interest securities following Proposal No. 10.
    One comment suggested the Department reduce the $1,000 minimum 
investment now required. The Department has determined that $1,000 is a 
reasonable minimum amount in light of the nature of the SLGS securities 
program and is not including this suggestion in the proposed rule.
    Proposal No. 3--The Department proposed to reduce the minimum 
maturity for zero interest time deposit certificates of indebtedness. 
All comments were in favor of this item and the Department is proposing 
a reduction from thirty to fifteen days for zero interest time deposit 
securities. One comment urged the Department to make all SLGS 
securities available in any maturity. The Department has determined 
that pricing interest bearing SLGS securities of less than thirty days 
maturity is not feasible, given the volatility of the market. The 
Department has also decided not to reduce the minimum maturity of zero 
interest SLGS securities to fewer than fifteen days due to operational 
constraints. Please refer to the comment on the elimination of special 
zero interest securities following Proposal No. 10.
    Proposal No. 4--The Department proposed to reduce the time between 
the date of subscription and the date of issue for time deposit SLGS 
securities. All comments were in favor of this item.

[[Page 39229]]

One comment suggested that the time be reduced to no longer than five 
business days. Accordingly, the Department is proposing a minimum 
notification of five days for subscriptions of $10 million or less and 
a minimum notification of seven days for subscriptions of over $10 
million.
    Proposal No. 5--The Department proposed a reduction of the twelve 
and one-half basis points differential between SLGS securities rates 
and rates of similar Treasury securities in the open market. All 
comments were in favor of this item except one that recommended it 
remain unchanged. There were specific suggestions on the basis point 
differential ranging from zero to five. The Department is proposing the 
basis point differential be reduced to five basis points.
    Proposal No. 6--The Department proposed investors be able to 
purchase SLGS securities with funds subject to rebate as well as yield 
restrictions. All comments were in favor of this item. The Department 
will include this item in the proposed rule. Other comments suggested:
    (a) Replace all eliminated certifications with a gross proceeds 
certification under Section 1.148-1(b) of the Income Tax regulations.
    (b) Allow all gross proceeds to be invested in SLGS securities.
    (c) Offer an instrument similar to a Guaranteed Investment Contract 
and provide for automatic reinvestment of SLGS securities.
    With respect to (a) and (b) above, the Department is proposing to 
remove all certifications from these regulations, including a gross 
proceeds certification. The Department believes that the nature and 
general scope of the program as described in Section 344.0(a) limits 
investment in SLGS securities to gross proceeds of tax-exempt bonds.
    With respect to (c), the Department believes that other changes 
being proposed to improve the SLGS program will address issuers' 
concerns about reinvestment risks. In addition, under this proposed 
rule, for example, an issuer would be able to make reinvestments and to 
invest interest payments at the current rate, provided it follows the 
revised notice requirements. Please refer to Proposal No. 10. The 
Department has determined not to offer products similar to Guaranteed 
Investment Contracts under the proposed rule.
    Proposal No. 7--The Department proposed revising the SLGS Demand 
Deposit program by adjusting the rate formula and by eliminating 
certifications that are duplicative of current tax regulations or could 
be better administered through the tax regulations. One comment 
suggested the program be eliminated altogether. This program is 
congressionally mandated, however, and the Department is therefore 
proposing to make it more attractive and easier to use. Specifically, 
the Department is proposing to eliminate the certifications and to 
reduce the Treasury administrative cost in the rate formula. Also, the 
Department is proposing to remove the $35 million dollar cap on 
investments in the Demand Deposit program.
    In order to facilitate the administration of the Demand Deposit 
program under the flexible rules proposed, for subscriptions of more 
than $10 million, Public Debt must receive the required notice between 
the date of subscription and date of issue in no less than seven days, 
rather than the present required notice period of three days. Receipt 
of notice by Public Debt between date of subscription and date of issue 
for subscriptions of less than $10 million would be increased to five 
days.
    Proposal No. 8--The Department proposed to change the formula for 
determining the redemption value of SLGS securities in a manner which 
could result in a premium for the subscriber in cases where the 
Treasury borrowing rate is lower than the stated interest rate of the 
SLGS security. All comments were in favor of this change. The 
Department is proposing to change the formula in a manner that could 
result in a premium upon redemption. There were five specific 
suggestions on this item:
    (a) The new redemption formula should be made available for SLGS 
securities issued prior to September 1, 1989. The Department has 
considered the suggestion and has decided not to change formulas that 
apply to previously purchased SLGS securities.
    (b) Change the current irrevocability of an early redemption notice 
to one where a six-month early redemption penalty results. The 
Department has determined that a six-month penalty would not be an 
adequate deterrent to the revocation of an early redemption notice. An 
issuer should not be harmed by the retention of this penalty as it 
would be able to roll over its investments.
    (c) Reduce the minimum holding period for time deposit notes and 
bonds, before allowing an early redemption, from one year to thirty 
days or less. The Department is adopting this suggestion and proposes 
to permit thirty days as a minimum period for holding time deposit 
notes and bonds.
    (d) In redemption calculations, take into consideration the maximum 
interest rate that an issuer could have subscribed for, instead of the 
actual rate on the outstanding security. The purpose of the redemption 
formula is to make the Department whole. This suggestion would be 
inconsistent with this purpose. In addition, issuers would have the 
flexibility to mix zero interest SLGS securities with either open 
market securities or with SLGS securities bearing the maximum rate. 
This should eliminate the problems commenters have cited. For these 
reasons, the Department is not incorporating this suggestion into the 
new formula.
    (e) Address the issue of whether a premium constitutes proceeds and 
how the premium should be treated for yield purposes. The issue 
identified in this suggestion is more appropriately determined under 
Section 148 of the tax regulations.
    Proposal No. 9--The Department proposed to allow zero interest time 
deposit SLGS securities to be redeemed early at par. All comments were 
in favor of this item. The Department has included this item in the 
proposed rule for zero interest time deposit SLGS securities.
    Proposal No. 10--The Department proposed to permit the purchase of 
SLGS securities with the proceeds of previously redeemed SLGS 
securities or open market Treasury securities. All comments were in 
favor of this item. The Department is proposing to permit the purchase 
of SLGS securities with proceeds of previously redeemed SLGS securities 
or open market Treasury securities.

Discontinuing the Issuance of Special Zero Interest Securities

    The Department is proposing to discontinue the issuance of special 
zero interest securities. Special zero interest securities were 
instituted to allow issuers to blend special zero interest securities 
with above-yield open market investments in instances where proceeds 
became subject to yield restrictions at some date after the issuance of 
the bonds. The current regulations provide that special zero interest 
securities may be redeemed without penalty as a further accommodation 
to the types of situations where this program could be used.
    Under the proposed rule, zero interest bearing time deposit 
securities would now be made available for purposes of rebate 
compliance, could be in the same escrow as open market investments, and 
could be redeemed early without penalty.
    In addition, the tax regulations provide issuers with the ability 
to make

[[Page 39230]]

``yield reduction payments'' for certain yield-restricted investments 
that are invested over the yield on the bonds. Yield reduction payment 
provisions cover virtually all instances when an issuer would use 
special zero interest securities, greatly reducing the need for this 
program.
    Therefore, there seems to be no reason to continue the issuance of 
special zero interest securities. The provisions for redemption of 
these securities would remain to govern the issues of special zero 
interest securities still outstanding.

Additional Comments

    Other comments received, not pertaining to the ten items in the 
ANPR, suggested the Department make further changes to the SLGS 
securities program as follows:
    (a) Issue zero coupon deep discount bills, notes and bonds for 
which the issuer could specify the maturity date. Interest on these 
securities would accrue and be paid at maturity. The Department is 
revising its SLGS computer system which currently is not capable of 
handling such securities. The Department is not including this 
suggestion in the proposed rule at this time, but will reconsider this 
suggestion in the future when its revised computer system is 
implemented. Until then, there should be little inconvenience because 
purchasers can satisfy their requirements by purchasing deep discount 
zero coupon securities in the open market.
    (b) Replace the penalty for revocation of the issuance of a SLGS 
security under Section 344.1(f)(3) (a six-month prohibition against 
subscribing for SLGS securities) with a monetary penalty. The 
Department has determined the six-month penalty is an adequate 
deterrent for non-settlement of a SLGS subscription and is not 
including this suggestion in the proposed rule.
    (c) Offer to bid and supply a portfolio of open market Treasury 
securities in circumstances where SLGS securities are not a viable 
investment alternative. The Department has determined that with all the 
changes proposed, SLGS securities are a viable investment. The 
Department is not including this suggestion in the proposed rule.
    (d) Amend Section 344.3(b)(3) to permit the acceleration, as well 
as the postponement of, the delivery dates of SLGS securities within 
administratively acceptable time limits. The Department has determined 
this suggestion has been sufficiently addressed in Proposal No. 4.
    (e) Revise the procedures to be followed when the sale of SLGS 
securities is suspended due to a debt ceiling limit and include an 
automatic waiver under Section 344.4 of all penalties for cancellation 
of a subscription. Due to varying circumstances in the event of a debt 
ceiling limit, the Department needs flexibility to deal with the 
various issues that arise during periods when sales are suspended due 
to debt ceiling limitations and has decided not to incorporate this 
suggestion in the proposed rule. Treasury, however, has never failed to 
deliver SLGS securities for subscriptions already accepted due to debt 
ceiling limitations.
    (f) Make current SLGS securities interest rates, SLGS securities 
regulations and historical SLGS securities rates available on the 
Internet, or some other ``free'' resource, rather than on the Commerce 
Department's Economic Bulletin Board. The Department is currently 
exploring the dissemination of such information by electronic means and 
will address this issue in the future. In the meantime these rates are 
now provided free by phone or fax by the Division of Special 
Investments, Bureau of the Public Debt, by calling its automated fax at 
(304) 480-7548 or by calling (304) 480-7752.
    (g) Permit the filing of electronic subscriptions. The Department 
is considering the electronic filing of subscriptions as a part of its 
computer system redesign now in progress. This suggestion will be 
addressed in a subsequent regulation.
    (h) Clarify who is to be listed as the ``beneficial owner'' for 
purposes of 31 CFR Part 306. The proposed rule clarifies that for 
purposes of this Section, the ``beneficial owner'' in Sections 344.0(b) 
and 344.3(b)(1), whose Tax Identification Number is used, is the state 
or local government entity, not the trustee or conduit borrower. The 
six-month penalty for cancellation would therefore be applied to the 
state or local government entity.
    (i) Modify the initial subscription requirements to require certain 
identifying characteristics of the source of proceeds to be invested so 
that in the event of a failure to settle, only those subscriptions for 
the same proceeds are precluded, rather than the Department 
``blacklisting'' any subscription submitted under that Taxpayer 
Identification Number. The Department has determined that monitoring 
such proceeds would not be administratively feasible and that a six-
month penalty is an adequate deterrent appropriately applied at the 
issuer level. The Department is therefore not including this suggestion 
in the proposed rule.
    (j) Make SLGS securities transferrable. The Department has 
considered the general issue of transferability and does not intend to 
change the prohibition against transfer now found in Section 344.1(b). 
To the extent this suggestion of transferability refers to the transfer 
of an account, such as a reserve fund investment, by an issuer from one 
bond issue to another bond issue of that subscriber under the same 
Taxpayer Identification Number, or between accounts of different 
security types, i.e., demand deposit to time deposit (as now prohibited 
by Section 344.1(c)), or from one trustee to another, the clarification 
of the beneficial owner should address the concern of the commenter. 
The Department however invites further comments on this suggestion.
    (k) Permit an issuer to notify the Bureau of the Public Debt that 
it is pricing a transaction for which it intends to invest in SLGS 
securities and thereby lock in the day's SLGS securities rate for a 
period of up to three days. The Department has determined Proposal No. 
4 sufficiently addresses this suggestion. Subscribers for $10 million 
or less must give at least five days notice and subscribers for more 
than $10 million must give seven days notice.
    (l) Eliminate the 10-year maximum maturity on special zero interest 
SLGS securities and eliminate any restrictions on their use, thereby 
making it the only zero yielding SLGS security. The Department has 
proposed to discontinue the issuance of special zero interest SLGS 
securities. Please refer to the expanded comment on this issue 
following Proposal No. 10.
    (m) Permit an issuer to restructure its SLGS portfolio by 
exchanging purchased SLGS securities for ones with similar cash flows. 
The Department has determined the proposal to allow easing of the early 
redemption rules for SLGS securities and the rollovers of investments 
in SLGS securities with previously redeemed SLGS securities would 
increase an issuer's flexibility in restructuring its portfolio. The 
Department is not including this suggestion in the proposed rule.
    (n) Allow the forward purchase of SLGS securities more than the 
currently permitted sixty days in Section 344.4. The Department has 
determined the flexibility provided in this proposed rule is 
sufficient. The Department has determined the benefit to the market is 
insufficient to overcome the administrative burden on the Department of 
maintaining subscription requests for a lengthy period and is not 
including this suggestion in the proposed rule.
    (o) Pay issuers the redemption value of matured SLGS securities by 
1:00 p.m. on the date of maturity. The Department

[[Page 39231]]

makes ACH payments available to the Federal Reserve Banks in time for 
posting at the commercial banks at the opening of the business day on 
the date of maturity. As the suggestion of a 1:00 p.m. payment on 
maturity date is now being met by the Department, it will not be 
included in the proposed rule.
    (p) The final comment raised several issues related to the yield 
restriction and rebate rules as they apply to pooled loan programs. The 
Department believes the changes to the SLGS program in the proposed 
regulations would assist issuers of pooled loan bonds. Other 
suggestions would be more appropriately dealt with in the tax 
regulations.
    As a result of these comments and decisions within the Treasury 
Department, this is being published in proposed form to give market 
participants an additional comment period.

II. Section By Section Summary

Subpart A--General Information
    Provisions included in the general information section apply to 
time deposit and demand deposit State and Local Government Series 
securities. Proposed changes from the 1995 regulations are as follows:
Subpart A--General Information
    (1) Section 344.0(b)--This section would be changed to redefine the 
term ``government body'' to make it clear SLGS securities are issued 
only to state and local governments and not to conduit borrowers.
    (2) Section 344.0(d)--A new section would be added to indicate that 
time deposit SLGS securities would be issued in a minimum amount of 
$1,000, or in any increments of not less than $1.00. Demand Deposit 
securities could be issued in any increment over the $1,000 minimum.
    (3) Section 344.1(a)--This section would be changed to note that 
copies of the circular may be obtained from the Division of Special 
Investments.
    (4) Section 344.1(h)--A new section would be added on noncompliance 
which applies to all subparts and the present noncompliance section in 
each subpart would be deleted. This section also clarified that late 
payment fees and administrative fees are due on demand.
    (5) Section 344.1(i)--Another general section would be added, 
titled General Redemption Provisions, stating a security may not be 
called for redemption by the Secretary of the Treasury prior to 
maturity. If a security is scheduled for redemption on a non-business 
day, it would be redeemed on the next business day. This section would 
apply to all subparts and duplications of this section that exist in 
the present regulations would be deleted.
    (6) Section 344.1(j)--A new section would be added to clarify that 
any reference to days refers to calendar days, unless otherwise noted.
Subpart B--Time Deposit Securities
    (1) Section 344.2(a)(1)--The reference to the $1,000 minimum would 
be deleted as it would be covered in 344.0(d). Section 344.0(d) would 
also state that increments above the minimum amount could be purchased 
for not less than $1.00 for time deposit securities. The minimum 
maturity period for zero percent certificates of indebtedness would be 
reduced from thirty days to fifteen days.
    (2) Section 344.2(a)(2)--The reference to the $1,000 minimum amount 
and the $100 increment above this amount would be deleted as it would 
be covered in the new general section, 344.0(d).
    (3) Section 344.2(a)(3)--The reference to the $1,000 minimum amount 
and the increment above this amount would be deleted as it would be 
covered in a new general section, 344.0(d).
    (4) Section 344.2(b)--The last sentence of this section would state 
the rates specified in the tables are five basis points below the then 
current estimated Treasury borrowing rate for a security of comparable 
maturity. Section 344.2(c)(2) would clarify that the Department may 
employ alternative methods of payment other than by ACH.
    (5) Section 344.2(c)(2)--This section would be amended to provide 
for payment of redemptions prior to maturity by Fedwire.
    (6) Section 344.3(b)(1)--This section would be amended to indicate 
that subscriptions must be received by Public Debt at least five days 
prior to issue date for subscriptions of $10 million or less and seven 
days for subscriptions of more than $10 million. Subscriptions of $10 
million or less could be canceled without penalty up to five days 
before the date of issuance. Subscriptions of more than $10 million 
could be canceled without penalty up to seven days before the date of 
issuance.
    This section would also note that a subscription sent in letter 
form would not be accepted unless it provided the Tax Identification 
Number of the government body.
    In the example of an initial subscription in letter form, the words 
``or other entity'' have been deleted to emphasize that the proper Tax 
Identification Number to insert is that of the state or local 
government owner, not that of a trustee bank or a conduit borrower.
    (7) Section 344.3(b)(4)--This section would be revised to read that 
no initial subscription would be required where a final subscription is 
received at least five days before the issue date for subscriptions of 
$10 million or less and at least seven days before the issue date for 
subscriptions of over $10 million.
    (8) Section 344.3(c)--This section would be amended to eliminate 
all certifications other than (3), which is being revised. The ``all or 
nothing'' rule of the certification in (1) Is being eliminated to 
facilitate the use of the time deposit securities for investment of 
proceeds that are subject to arbitrage rebate. This change in the 
proposed regulations should alleviate some of the need to calculate 
rebate if funds can be invested at the bond yield for a longer term. In 
general, to the extent that the certifications were a result of 
concerns about abuse of the tax regulations and the SLGS program, the 
Department has determined that the yield restriction and rebate rules 
are more appropriately enforced under the tax regulations. (In cases of 
abuse of the tax regulations which also involve SLGS securities, these 
enforcement efforts may be supplemented by the Secretary's authority 
under section 344.1(f) to revoke subscriptions.) The certification in 
(3) would be revised to apply only to SLGS securities purchased prior 
to December 27, 1976. Certifications in (4) would be eliminated because 
of certain prior changes to the SLGS securities regulations (such as 
the change to daily SLGS securities rates), and because of proposed 
changes to the early redemption penalties under section 344.5, 
contained in these proposed regulations. Additionally, the word 
``beneficial owner'' is being changed to ``government body'' to make it 
clear that the proper Tax Identification Number to be used is that of 
the government entity.
    (9) Section 344.4 General.--This section would be amended to state 
that the issue date of a subscription may not exceed by more than sixty 
days the date the subscription was received by Public Debt.
    (10) Section 344.4(b)--This section would be eliminated as it is 
now covered in the general provisions applicable to all SLGS 
securities, 344.0(h).
    (11) Section 344.5(a)--This section would be eliminated as it would 
be covered in the general provisions applicable to all SLGS securities, 
344.0(i).
    (12) Section 344.5(a)(2)--The word ``subscriber'' is being changed 
to ``government body'' to make it clear that

[[Page 39232]]

the proper Tax Identification Number to be used is that of the 
government entity.
    (13) Section 344.5(b)(1)--This section would be amended to provide 
that zero interest certificates may be redeemed before maturity at the 
owner's option no earlier than fifteen days before maturity for 
certificates of fifteen to twenty-nine days duration and no earlier 
than thirty days after the issue date in the case of a note or bond.
    (14) Section 344.5(b)(2)--This section would be amended to change 
the word ``subscriber'' to ``state or local government body owner'' in 
the 3rd sentence of this section. This section would further be amended 
to read that notice of redemption must be received by Public Debt no 
less than ten days before the requested redemption date, rather than 
the current fifteen-day requirement.
    (15) Section 344.5(b)(3)--This would be a new section which 
provides for the calculation of redemption proceeds for SLGS securities 
purchased on or after the effective date of the final rule. This 
section would change the formula for determining the early redemption 
value of SLGS securities to one where the remaining interest and 
principal payments are discounted by the current Treasury borrowing 
rate for the remaining term to maturity of the security being redeemed.
    This would result in a premium in cases where the Treasury 
borrowing rate is lower than the stated interest rate of the SLGS 
securities. This section would further refer to Appendix B at the end 
of Part 344 for the calculation of the formula.
    This section would also read that there would be no market charge 
for zero interest time deposit securities. The redemption proceeds for 
a zero interest security would therefore be a return of the principal 
invested.
Subpart C--Demand Deposit Securities
    (1) Section 344.5(a)--This section would be revised to delete the 
reference to a $1,000 minimum investment as this would be covered in 
the new general section, 344.0(d).
    (2) Section 344.6(b)(2)(i)--The Department intends to publish a 
Federal Register notice when the SLGS securities regulations are 
finalized providing the marginal tax rate and the Treasury 
Administrative Cost (TAC) to be used in the demand deposit program. A 
reduction in the TAC similar to the reduction to five basis points is 
contemplated in the differential between time deposit SLGS security 
rates and rates on similar Treasury securities in the open market.
    (3) Section 344.7(a)--This section would be amended by stating that 
subscriptions for $10 million or less must be received by Public Debt 
at least five days prior to the date of issue and would require that 
subscriptions over $10 million be received by Public Debt at least 
seven days prior to the date of issue.
    (4) Section 344.7(c)(1)--This section would be removed since under 
the proposed rule, the $35 million cap on issues of demand deposit 
securities would be eliminated.
    (5) Section 344.7 (c)(2) through (c)(5)--These certifications would 
be eliminated because they can be administered more effectively under 
the tax regulations of Section 148 of the Internal Revenue Code. The 
tax regulations would be amended to reflect the transfer of these 
certifications (to the extent not already covered by the tax 
regulations).
    (6) Section 344.8(b)--This section would be eliminated as it would 
be covered in the general section applicable to all SLGS securities, 
344.1(h).
    (7) Section 344.9(a)--This section will be amended to provide for 
redemption payments by Fedwire.
    (8) Section 344.9(b)--This section would be amended to state that 
notice of redemptions for subscriptions of more than $10 million must 
be received at least three business days prior to the scheduled date of 
redemption. Redemption notice for subscriptions of $10 million or less 
would remain unchanged at one business day.
    (9) Section 344.9(c)--This section will be eliminated as the rules 
regarding expenditure of proceeds are covered by the tax regulations.
Subpart D--Special Zero Interest Securities
    (1) Section 344.10--This section would be amended to add that the 
Department has discontinued the issuance of this type of security as of 
the effective date of the final rule. The proposed amendment to the 
time deposit security subpart, which would permit investment for rebate 
and yield restriction purposes, would eliminate the need for a separate 
Special Zero Interest Program. Under the proposed revisions, the 
following sections of this Subpart would apply only to special zero 
interest securities issued before the effective date of the final rule. 
Subpart B, governing time deposit securities, would be changed in a 
manner that permits time deposit zero interest securities to be 
redeemed without penalty. Investors that hold special zero interest 
securities issued prior to the effective date of the final rule would 
be able to redeem these securities without penalty.
    (2) Section 344.11--This section would be eliminated.
    (3) Section 344.12--This section would be eliminated.
    (4) Section 344.13--This section would now become Section 344.11 
and remain in effect for the special zero interest accounts now 
outstanding. The minimum holding period for redeeming a note after 
issue date would be changed from one year to thirty days. The word 
``subscriber'' will be changed to ``government body'' to clarify that 
the proper Tax Identification Number to be used is that of the 
government entity. Redemption notices must be received by Public Debt 
within the proscribed limits.
    Appendix A to Part 344--There would be a clarifying statement that 
these formulas apply to SLGS securities issued before the effective 
date of the final rule.
    Appendix B to Part 344--There would be a new formula in this 
section for determining the redemption value for all early redeemed 
time deposit SLGS securities. This formula would reflect the change 
that the remaining interest and principal payments are discounted by 
the Treasury borrowing rate for the remaining term to maturity of the 
security being redeemed. This would result in a premium in cases where 
the Treasury borrowing rate is lower than the stated interest rate of 
the SLGS security.

Procedural Requirements

    It has been determined this proposed rule is not a significant 
regulatory action as defined in Executive Order 12866. Therefore, an 
assessment of anticipated benefits, costs and regulatory alternatives 
is not required.
    Although this rule is being issued to secure the benefit of public 
comment, the rule relates to matters of public contract, as well as the 
borrowing power and fiscal authority of the United States. The notice 
and public procedures requirements of the Administrative Procedure Act 
are inapplicable, pursuant to 5 U.S.C. 553(a)(2). As no notice of 
proposed rulemaking was required, the provisions of the Regulatory 
Flexibility Act (5 U.S.C. 601 et seq.) do not apply.
    The proposed rule does not alter the collection of information 
previously reviewed and approved by the Office of Management and 
Budget, in accordance with the requirements of the Paperwork Reduction 
Act (44 U.S.C. 3507) under control number 1535-0091. The principal 
purpose of the proposed rule

[[Page 39233]]

is to make the SLGS securities program more attractive and flexible for 
investors. The revision would not impose a new collection of 
information requirement.

List of Subjects in 31 CFR Part 344

    Bonds, Government securities, Securities.

    Dated: July 22, 1996.
Gerald Murphy,
Fiscal Assistant Secretary.

    For the reasons set forth in the preamble, part 344 of title 31 of 
the Code of Federal Regulations is proposed to be revised to read as 
follows:

PART 344--REGULATIONS GOVERNING UNITED STATES TREASURY CERTIFICATES 
OF INDEBTEDNESS, TREASURY NOTES, AND TREASURY BONDS--STATE AND 
LOCAL GOVERNMENT SERIES

Subpart A--General Information

Sec.
344.0  Offering of securities.
344.1  General provisions.

Subpart B--Time Deposit Securities

344.2  Description of securities.
344.3  Subscription for purchase.
344.4  Issue date and payment.
344.5  Redemption.

Subpart C--Demand Deposit Securities

344.6  Description of securities.
344.7  Subscription for purchase.
344.8  Issue date and payment.
344.9  Redemption.

Subpart D--Special Zero Interest Securities

344.10  General.
344.11  Redemption.

    Appendix A to Part 344--Early Redemption Market Charge Formulas and 
Examples for Subscription from September 1, 1989, through [date of 
publication of final rule]
    Appendix B to Part 344--Formula for Determining Redemption Value 
for Securities Purchased and Early-Redeemed After [date of publication 
of final rule]

    Authority: 26 U.S.C. 141 note; 31 U.S.C. 3102 et seq.,

Subpart A--General Information


Sec. 344.0  Offering of securities.

    (a) In order to provide issuers of tax exempt securities with 
investments which allow them to comply with yield restriction and 
arbitrage rebate provisions of the Internal Revenue Code, the Secretary 
of the Treasury offers for sale the following State and Local 
Government Series securities:
    (1) Time deposit securities:
    (i) United States Treasury Certificates of Indebtedness;
    (ii) United States Treasury Notes; and
    (iii) United States Treasury Bonds.
    (2) Demand deposit securities--United States Treasury Certificates 
of Indebtedness.
    (b) As appropriate, the definitions of terms used in part 344 are 
those found in the relevant portions of the Internal Revenue Code and 
the tax regulations. The term ``government body'' refers to issuers of 
state or local government bonds described in section 103 of the 
Internal Revenue Code.
    (c) The securities in paragraph (a) of this section will be issued 
in a minimum amount of $1,000, or in any larger amount in increments of 
not less than $1.00 for time deposit securities and in any increments 
over the $1,000 minimum for demand deposit securities above the stated 
minimum.
    (d) This offering will continue until terminated by the Secretary 
of the Treasury.


Sec. 344.1  General provisions.

    (a) Regulations. United States Treasury securities--State and Local 
Government Series shall be subject to the general regulations with 
respect to United States securities, which are set forth in the 
Department of the Treasury Circular No. 300 (31 CFR part 306), to the 
extent applicable. Copies of the circular may be obtained from the 
Bureau of the Public Debt, Division of Special Investments--Room 309, 
200 Third Street, P.O. Box 396, Parkersburg, WV 26102-0396, or a 
Federal Reserve Bank or Branch.
    (b) Issuance. The securities will be issued in book-entry form on 
the books of the Department of the Treasury, Bureau of the Public Debt, 
Parkersburg, WV. Transfer of securities by sale, exchange, assignment, 
pledge, or otherwise is not permitted.
    (c) Transfers. Securities held in an account of any one type, i.e., 
time deposit, demand deposit, or special zero interest, may not be 
transferred within that account or to an account of any other type.
    (d) Fiscal agents. Selected Federal Reserve Banks and Branches, as 
fiscal agents of the United States, may be designated to perform such 
services as may be requested of them by the Secretary of the Treasury 
in connection with the purchase of, transactions involving, and 
redemption of, the securities.
    (e) Authority of subscriber. Where a commercial bank submits an 
initial or final subscription on behalf of a government body, it must 
certify it is acting under the latter's specific authorization. 
Ordinarily, evidence of such authority will not be required. 
Subscriptions submitted by an agent other than a commercial bank must 
be accompanied by evidence of the agent's authority to act. Such 
evidence must describe the nature and scope of the agent's 
authorization, must specify the legal authority under which the agent 
was designated, and must relate by its terms to the investment action 
being undertaken. Subscriptions unsupported by such evidence will not 
be accepted.
    (f) Reservations. Transaction requests, including requests for 
subscription and redemption, will not be accepted if unsigned, 
inappropriately completed, or not timely submitted. Any of these 
actions shall be final. The authority of the Secretary to waive 
regulations under 31 CFR 306.126 applies to part 344. The Secretary of 
the Treasury reserves the right:
    (1) To reject any application for the purchase of securities under 
this offering;
    (2) To refuse to issue any such securities in any case or any 
class(es) of cases; and
    (3) To revoke the issuance of any security, and to declare the 
subscriber ineligible thereafter to subscribe for securities under this 
offering, if:
    (i) Any security is issued on the basis of an improper 
certification or other misrepresentation by the subscriber (other than 
as the result of an inadvertent error),
    (ii) The issuance of any security is in conjunction with a 
violation of the tax regulations, as determined by the Internal Revenue 
Service or
    (iii) The Secretary deems such action to be in the public interest.
    (g) Debt limit contingency. The Department of the Treasury reserves 
the right to change or suspend the terms and conditions of this 
offering, including provisions relating to subscriptions for, and 
issuance of, securities, interest payments, redemptions, and rollovers, 
as well as notices relating hereto, at any time the Secretary 
determines that issuance of obligations sufficient to conduct the 
orderly financing operations of the United States cannot be made 
without exceeding the statutory debt limit. Announcement of such 
changes shall be provided by such means as the Secretary deems 
appropriate.
    (h) Noncompliance. The penalty imposed on any government body which 
fails to make settlement on a subscription once submitted and not 
canceled timely shall be to render the government body ineligible 
thereafter to subscribe for securities under any offering in part 344 
for a period of six

[[Page 39234]]

months, beginning on the date the subscription is withdrawn or the 
proposed issue date, whichever occurs first. The Division of Special 
Investments may determine to waive the six-month penalty, pursuant to 
the provisions governing the waiver of regulations set forth under 31 
CFR 306.126. Where settlement occurs after the proposed issue date and 
the Division of Special Investments determines, pursuant to 31 CFR 
306.126, that settlement is acceptable on an exception basis, the six-
month penalty will be waived and the government body shall be subject 
to a late payment assessment. The late payment assessment will equal 
the amount of interest that would have accrued on the securities from 
the proposed issue date to the date of settlement, as well as an 
administrative fee of $100 per subscription. Assessments of late 
payment fees and administrative fees under part 344 are due on demand.
    (i) General redemption provisions. A security may not be called for 
redemption by the Secretary of the Treasury prior to maturity. Upon the 
maturity of a security, the Department will make payment of the 
principal amount and interest due to the owner thereof. A security 
scheduled for redemption on a non-business day will be redeemed on the 
next business day.
    (j) Unless otherwise noted, any reference herein to days refers to 
calendar days.

Subpart B--Time Deposit Securities


Sec. 344.2  Description of securities.

    (a) Terms. (1) Certificates will be issued with maturity periods 
fixed by the government body, from thirty days up to and including one 
year, or for any intervening period; provided, for certificates that 
bear no interest, the maturity period may be fixed by the government 
body from fifteen days up to and including one year or for any 
intervening period.
    (2) Notes. The notes will be issued with maturity periods fixed by 
the government body, from one year and one day up to and including ten 
years, or for any intervening period.
    (3) Bonds. The bonds will be issued with maturity periods fixed by 
the government body, from ten years and one day up to and including 
thirty years, or for any intervening period.
    (b) Interest rate. Each security shall bear such rate of interest 
as the government body shall designate, but the rate shall not exceed 
the maximum interest rate. The applicable maximum interest rates for 
each day shall equal rates shown in a SLGS securities rate table, which 
will be released by the Department to the public by 10:00 a.m., Eastern 
time, each business day. If the Department finds that due to 
circumstances beyond its control the rates will not be available to the 
public by 10:00 a.m., Eastern time, on any given business day, the 
applicable interest for the last preceding business day shall apply. 
The applicable rate table for any subscription is the one in effect on 
the date the initial subscription is received at Public Debt. 
Subscriptions received on a non-business day will be subject to those 
interest rates which are in effect for the next business day. The rates 
specified in the tables are five basis points below the then current 
estimated Treasury borrowing rate for a Treasury security of comparable 
maturity and may be found by investors in the Commerce Department's 
Economic Bulletin Board or may be obtained from the Division of Special 
Investment's automated fax at (304)480-7548 or by calling (304) 480-
7752.
    (c) Payment. (1) Interest computation and payment dates. Interest 
on a certificate will be computed on an annual basis and will be paid 
at maturity with the principal. Interest on a note or bond will be paid 
semi-annually. The government body will specify the first interest 
payment date, which must occur any time between thirty days and one 
year of the date of issue, and the final interest payment date must 
coincide with the maturity date of the security. Interest for other 
than a full semi-annual interest period is computed on the basis of a 
365-day or 366-day year (for certificates) and on the basis of the 
exact number of days in the half-year (for notes and bonds). See 
appendix to subpart E of Part 306 of this chapter for rules regarding 
computation of interest.
    (2) Method of payment. Payment may be made by the Automated 
Clearing House method (ACH) for the owner's account at a financial 
institution designated by the owner. Redemptions prior to maturity will 
be paid by Fedwire. To the extent applicable, provisions of Sec. 357.26 
on ``Payments,'' as set forth in 31 CFR part 357 and provisions of 31 
CFR part 370, shall govern ACH payments made under this offering. The 
Department of the Treasury may employ alternate payment procedures, 
instead of ACH, in any case, or class of cases where operational 
considerations necessitate such action.


Sec. 344.3  Subscription for purchase.

    (a) Subscription requirements. Subscriptions for purchase of 
securities under this offering must be submitted to the Division of 
Special Investments, Bureau of the Public Debt, 200 Third Street, P.O. 
Box 396, Parkersburg, WV 26102-0396. Initial and final subscriptions 
may be submitted by fax at (304) 480-6818, by mail, or by other 
carrier. All subscriptions submitted by mail, whether initial or final, 
should be sent by certified or registered mail.
    (b) Initial subscriptions. (1) An initial subscription, either on a 
designated Treasury form or in letter form, stating the principal 
amount to be invested and the issue date, must be received by Public 
Debt at least five days before the issue date for subscriptions of $10 
million or less, and at least seven days before the issue date for 
subscriptions of over $10 million, but in no event will subscriptions 
be received more than 60 days prior to issue date. Subscriptions may be 
sent by facsimile transfer (fax) on (304) 480-6818, carrier service, 
U.S. Postal Service or other means. If the subscription is faxed, the 
original document must be received by Public Debt no later than the 
issue date. Initial subscriptions of $10 million or less may be 
canceled without penalty by the subscriber prior to the close of 
business on the fifth day before issue date. If the fifth day before 
issue date falls on a non-business day, the cancellation must occur on 
the preceding business day. Subscriptions of more than $10 million may 
be canceled without penalty by the subscriber prior to the close of 
business of the seventh day before issue date. For example, if 
securities totaling $10 million or less are to be issued on March 16, 
the initial subscription must be received by Public Debt no later than 
March 11. If securities totaling more than $10 million are to be issued 
on March 16, the initial subscription must be received by Public Debt 
no later than March 9. If the initial subscription is in letter form, 
it must contain the Tax Identification Number of the government body or 
it will not be accepted. It should read substantially as follows:

    To: Bureau of the Public Debt

----------------------------------------------------------------------
    Pursuant to the provisions of Department of the Treasury 
Circular, Public Debt Series No. 3-72, current revision, the 
undersigned hereby subscribes for United States Treasury Time 
Deposit Securities--State and Local Government Series, to be issued 
as entries on the books of the Bureau of the Public Debt, Department 
of the Treasury, in the total amount and with the issue date shown 
below, which date is at least five/seven days after the date of this 
subscription:

Principal Amount $-----------------------------------------------------

Issue Date-------------------------------------------------------------

[[Page 39235]]

    The undersigned agrees the final subscription and payment will 
be submitted on or before the issue date.

----------------------------------------------------------------------
(Tax I.D. Number of state or local government body eligible to 
purchase State and Local Government Series securities)
----------------------------------------------------------------------

(Name of state or local government body eligible to purchase State 
and Local Government Series securities)

----------------------------------------------------------------------

        (Date)

by---------------------------------------------------------------------
        (Signature and Title)

    (2) The provisions set out in paragraph (e) of Sec. 344.1, dealing 
with the authority of the subscriber to act on behalf of a government 
body, and in Sec. 344.1(h), relating to the failure to complete a 
subscription, apply to initial, as well as final, subscriptions.
    (3) An initial subscription may be amended on or before the issue 
date, but no later than 3:00 p.m., Eastern time, on the issue date. 
Notification may be faxed to the Bureau of the Public Debt at (304) 
480-6818 provided the request is clearly identified as an amendment and 
is immediately followed by the submission, by mail or other carrier, of 
written notification. Amendments to initial subscriptions are 
acceptable with the following exceptions:
    (i) The issue date may not be changed to require issuance earlier 
than the issue date originally specified or to require issuance more 
than seven days later than originally specified. If such change is 
made, notification should be provided to the Bureau of the Public Debt 
as soon as possible, but no later than 3:00 p.m., Eastern time, one 
business day before the originally specified issue date;
    (ii) The aggregate amount may not be changed by more than the ten 
percent limitation set out in paragraph (c) of this section;
    (iii) An interest rate may not be changed to a rate that exceeds 
the maximum interest rate in the table that was in effect for a 
security of comparable maturity on the date the initial subscription 
was submitted; and
    (iv) Where an amendment is not submitted timely, the Division of 
Special Investments may determine, pursuant to the provisions governing 
waiver of regulations set forth under 31 CFR 306.126, that such an 
amendment is acceptable on an exception basis. Where an amendment is 
determined to be acceptable on an exception basis, the amended 
information shall be used as the basis for issuing the securities, and 
an administrative fee of $100 per subscription will be assessed. This 
administrative fee is due on demand as provided for in Sec. 344.1(h). 
The Secretary reserves the right to reject amendments which are not 
submitted timely.
    (4) No initial subscription will be required where a final 
subscription is received at least five days before the issue date for 
subscriptions of $10 million or less and at least seven days before the 
issue date for subscriptions over $10 million. Such final subscription 
will be treated as the initial subscription for purposes of determining 
the applicable interest rate table (see Sec. 344.2(b)), and may be 
amended on or before the issue date, subject to the exceptions in 
paragraph (b)(3) of this section.
    (c) Final subscriptions. A final subscription must be received by 
the Bureau of the Public Debt on or before the issue date, but no later 
than 3:00 p.m., Eastern time, on the issue date. The final subscription 
may be faxed to the Bureau of the Public Debt at (304) 480-6818, 
provided the fax is properly identified as a final subscription and is 
immediately followed by the submission of the original subscription 
form by mail or other carrier. The final subscription must be for a 
total principal amount that is no more than ten percent above or below 
the aggregate principal amount specified in the initial subscription. 
The final subscription, dated and signed by an official authorized to 
make the purchase and showing the taxpayer identification number of the 
government body, must be accompanied by a copy of the initial 
subscription, where applicable. The various maturities, interest rates, 
and interest payment dates (in the case of notes and bonds), must be 
specified in the final subscription, as well as the title(s) of the 
designated official(s) authorized to request early redemption. Final 
subscriptions submitted for certificates, notes and bonds must 
separately itemize securities of each maturity and each interest rate. 
The final subscription must contain a statement by the subscriber that 
none of the proceeds submitted in payment is derived (directly or 
indirectly) from the redemption before maturity of other securities of 
the State and Local Government Series purchased on or before December 
27, 1976.


Sec. 344.4  Issue date and payment.

    The subscriber shall fix the issue date of each security in the 
initial subscription. The issue date must be a business day and may not 
exceed by more than sixty days the date the initial subscription was 
received by Public Debt. Full payment for each subscription must be 
submitted by the Fedwire funds transfer system with credit directed to 
the Treasury's General Account. Full payment should be submitted by 
3:00 p.m., Eastern time, to ensure that settlement on the securities 
occurs on the date of issue.


Sec. 344.5  Redemption.

    (a) Redemption before maturity--(1) In general. A security may be 
redeemed at the owner's option no earlier than twenty-five days after 
the issue date in the case of a certificate of thirty days or more, no 
earlier than fifteen days before the scheduled maturity for zero 
interest certificates of fifteen to twenty-nine days duration, and no 
earlier than thirty days after the issue date in the case of a note or 
bond. Partial redemptions may be requested in any amount; however, an 
account balance of less than $1,000 will be redeemed in total.
    (2) Notice. Notice of redemption prior to maturity must be 
submitted, either on a designated Treasury form or by letter, by the 
official(s) authorized to redeem the securities, as shown on the final 
subscription form, to the Division of Special Investments, Bureau of 
the Public Debt, 200 Third Street, P.O. Box 396, Parkersburg, WV 26102-
0396. The notice may be submitted by fax to the Bureau of the Public 
Debt at (304) 480-6818, by mail or by other carrier. The notice must be 
received by Public Debt no less than ten days before the requested 
redemption date, but no more than sixty days before the requested 
redemption date. The notice must show the account number, the 
maturities of the securities to be redeemed, and the Tax Identification 
Number of the government body. A notice of redemption prior to maturity 
may not be canceled.
    (3) Redemption proceeds--Subscriptions on or after [date of 
publication of final rule]. For securities subscribed for on or after 
[date of publication of final rule], the amount of the redemption 
proceeds is calculated as follows:
    (i) Interest. If a security is redeemed before maturity on a date 
other than a scheduled interest payment date, interest will be paid for 
the fractional interest period since the last interest payment date.
    (ii) Redemption value. The remaining interest and principal 
payments are discounted by the current Treasury borrowing rate for the 
remaining term to maturity of the security being redeemed. This does 
not apply to SLGS securities purchased before [date of publication of 
final rule]. The term ``current Treasury borrowing rate'' is determined 
in accordance with Sec. 344.2(b). The formulas for calculating the 
redemption value under this section are set forth in

[[Page 39236]]

Appendix B of this part. Redemption proceeds in the case of a zero-
interest security are a return of the principal invested.
    (4) Redemption proceeds--Subscriptions from September 1, 1989, 
through [date one day prior to publication date of final rule]. For 
securities subscribed for from September 1, 1989, through [date one day 
prior to publication date of final rule], the amount of the redemption 
proceeds is calculated as follows:
    (i) Interest. If a security is redeemed before maturity on a date 
other than a scheduled interest payment date, interest will be paid for 
the fractional interest period since the last interest payment date.
    (ii) Market charge. An amount shall be deducted from the redemption 
proceeds in all cases where the current borrowing rate of the 
Department of the Treasury for the remaining period to original 
maturity of the security prematurely redeemed exceeds the rate of 
interest originally fixed for such security. The amount shall be the 
present value of the future increased borrowing cost to the Treasury. 
The annual increased borrowing cost for each interest period is 
determined by multiplying the principal by the difference between the 
two rates. For notes and bonds, the increased borrowing cost for each 
remaining interest period to original maturity is determined by 
dividing the annual cost by two. For certificates, the increased 
borrowing cost for the remaining period to original maturity is 
determined by multiplying the annual cost by the number of days 
remaining until original maturity divided by the number of days in the 
calendar year. Present value shall be determined by using the current 
Treasury borrowing rate as the discount factor. The term ``current 
Treasury borrowing rate'' means the applicable rate shown in the table 
of maximum interest rates payable on United States Treasury 
securities--State and Local Government Series--for the day the request 
for early redemption is received by Public Debt, plus \1/8\ of 1 
percentage point. Where redemption is requested as of a date less than 
thirty days before the original maturity date, such applicable rate is 
the rate shown for a security with a maturity of thirty days. The 
market charge for bonds, notes, and certificates of indebtedness can be 
computed by use of the formulas in Appendix A to this part.
    (5) Redemption proceeds--Subscriptions from December 28, 1976, 
through August 31, 1989. For securities subscribed for from December 
28, 1976, through August 31, 1989, the amount of the redemption 
proceeds is calculated as follows:
    (i) Interest. Interest for the entire period the security was 
outstanding shall be recalculated on the basis of the lesser of the 
original interest rate at which the security was issued, or the 
interest rate that would have been set at the time of the initial 
subscription had the term for the security been for the shorter period. 
If a note or bond is redeemed before maturity on a date other than a 
scheduled interest payment date, no interest will be paid for the 
fractional interest period since the last interest payment date.
    (ii) Overpayment of interest. If there have been overpayments of 
interest, as determined under paragraph (b)(5)(i) of this section, 
there shall be deducted from the redemption proceeds the aggregate 
amount of such overpayments, plus interest, compounded semi-annually, 
thereon from the date of each overpayment to the date of redemption. 
The interest rate to be used in calculating the interest on the 
overpayment shall be one-eighth of one percent above the maximum rate 
that would have applied to the initial subscription had the term of the 
security been for the shorter period.
    (iii) Market charge. An amount shall be deducted from the 
redemption proceeds in all cases where the current borrowing rate of 
the Department of the Treasury for the remaining period to original 
maturity of the security prematurely redeemed exceeds the rate of 
interest originally fixed for such security. The amount shall be 
calculated using the formula in paragraph (b)(4)(ii) of this section.
    (6) Redemption proceeds--Subscriptions on or before December 27, 
1976. (i) For securities subscribed for on or before December 27, 1976, 
the amount of the redemption proceeds is calculated as follows.
    (ii) The interest for the entire period the security was 
outstanding shall be recalculated on the basis of the lesser of the 
original interest rate at which the security was issued, or an adjusted 
interest rate reflecting both the shorter period during which the 
security was actually outstanding and a penalty. The adjusted interest 
rate is the Treasury rate which would have been in effect on the date 
of issuance for a marketable Treasury certificate, note, or bond 
maturing on the quarterly maturity date prior to redemption (in the 
case of certificates), or on the semi-annual maturity period prior to 
redemption (in the case of notes and bonds), reduced in either case by 
a penalty which shall be the lesser of:
    (A) One-eighth of one percent times the number of months from the 
date of issuance to original maturity, divided by the number of full 
months elapsed from the date of issue to redemption; or
    (B) One-fourth of one percent.
    (iii) There shall be deducted from the redemption proceeds, if 
necessary, any overpayment of interest resulting from previous payments 
made at a higher rate based on the original longer period to maturity.
    (b) [Reserved]

Subpart C--Demand Deposit Securities


Sec. 344.6  Description of securities.

    (a) Terms. The securities are defined as one-day certificates of 
indebtedness. Each subscription will be established as a unique 
account. Securities will be automatically rolled over each day unless 
redemption is requested.
    (b) Interest rate. (1) Each security shall bear a variable rate of 
interest based on an adjustment of the average yield for three-month 
Treasury bills at the most recent auction. A new rate will be effective 
on the first business day following the regular auction of three-month 
Treasury bills and will be shown in a SLGS securities rate table, 
available to the public on such business day. Interest will be accrued 
and added to principal daily. Interest will be computed on the balance 
of the principal, plus interest accrued through the immediately 
preceding day.
    (2)(i) The annualized effective demand deposit rate in decimals, 
designated ``I'' in Equation 1 is calculated as:
[GRAPHIC] [TIFF OMITTED] TP26JY96.002

where:

P=Average auction price for the most recently auctioned 13-week 
Treasury bill, per hundred, to three decimals.
Y=365 if the year following issue date does not contain a leap year day 
and 366 if it does contain a leap year day.
DTM=The number of days from date of issue to maturity for the most 
recently auctioned 13-week Treasury bill.
MTR=Estimated marginal tax rate, in decimals, of purchasers of short-
term tax-exempt bonds.
TAC=Treasury administrative costs, in decimals.


[[Page 39237]]


    (ii) The daily factor for the demand deposit rate is then 
calculated as follows:
[GRAPHIC] [TIFF OMITTED] TP26JY96.003

    (3) Information as to the estimated average marginal tax rate and 
costs for administering the demand deposit State and Local Government 
Series securities program, both to be determined by Treasury from time 
to time, will be published in the Federal Register.
    (c) Payment. Interest earned on the securities will be added to the 
principal and will be reinvested daily until redemption. At any time 
the Secretary determines that issuance of obligations sufficient to 
conduct the orderly financing operations of the United States cannot be 
made without exceeding the statutory debt limit, the Department will 
invest any unredeemed demand deposit securities in special ninety-day 
certificates of indebtedness. These ninety-day certificates will be 
payable at maturity, but redeemable before maturity, provided funds are 
available for redemption, or reinvested in demand deposit securities 
when regular Treasury borrowing operations resume, both at the owner's 
option. Funds invested in the ninety-day certificates of indebtedness 
will earn simple interest equal to the daily factor in effect at the 
time demand deposit security issuance is suspended, multiplied by the 
number of days outstanding.


Sec. 344.7  Subscription for purchase.

    (a) Subscription requirements. Subscriptions for purchase of 
securities under this offering must be submitted to the Division of 
Special Investments, Bureau of the Public Debt, 200 Third Street, P.O. 
Box 396, Parkersburg, WV 26102-0396. Subscriptions must be submitted on 
a designated Treasury form, must specify the principal amount to be 
invested and the issue date, and must be signed by an official 
authorized to make the purchase. The Bureau of the Public Debt must 
receive the subscription at least five business days before the issue 
date for subscriptions of $10 million or less and at least seven 
business days before the issue date for subscriptions of more than $10 
million. Subscriptions for more than $10 million can be canceled 
without penalty up to seven days prior to the issue date. Subscriptions 
for $10 million or less may be canceled without penalty up to five days 
prior to the issue date. The subscription may be submitted by fax at 
(304) 480-6818, by certified or registered mail, or by other carrier. 
If faxed, the original subscription form must be received by the 
Division of Special Investments by 3:00 p.m., Eastern time, on the 
issue date. Public Debt will not accept subscriptions for demand 
deposit securities more than 60 days prior to the issue date.
    (b) Amending subscriptions. The principal amount to be invested may 
be changed without penalty on or before the issue date, but no later 
than 1:00 p.m. Eastern time, on the issue date. The request must be 
clearly identified as an amendment and must be followed immediately by 
the submission, by mail or other carrier, of written notification. 
Where an amendment is not submitted timely, the Division of Special 
Investments may determine, pursuant to the provisions governing waiver 
of regulations set forth under 31 CFR 306.126, that such an amendment 
is acceptable on an exception basis. Where an amendment is determined 
to be acceptable on an exception basis, the amended information shall 
be used as the basis for issuing the securities, and an administrative 
fee of $100 per subscription will be assessed. This administrative fee 
is due on demand as provided for in Sec. 344.1(h). The Secretary 
reserves the right to reject amendments which are not submitted timely.


Sec. 344.8  Issue date and payment.

    The subscriber shall fix the issue date on the subscription, the 
issue date to be a business day at least five business days after 
receipt of the subscription by the Division of Special Investments for 
subscriptions of $10 million or less and seven business days after 
receipt of the subscription by the Division of Special Investments for 
subscriptions more than $10 million. Full payment for each subscription 
must be submitted by the Fedwire funds transfer system with credit 
directed to the Treasury's General Account. Full payment should be 
received by the Division of Special Investments by 3:00 p.m., Eastern 
time, to ensure that settlement on the securities occurs on the issue 
date.


Sec. 344.9  Redemption.

    (a) General. A security may be redeemed at the owner's option, 
provided a request for redemption is received not less than one 
business day prior to the requested redemption date for redemptions of 
$10 million or less and received not less than three business days for 
redemptions of more than $10 million. Partial redemptions may be 
requested in any amount; however, an account balance of less than 
$1,000 will be redeemed in total. Payment will be made by Fedwire.
    (b) Notice. Notice of redemption must be submitted, either on a 
designated Treasury form or by letter, by the official(s) authorized to 
redeem the securities, as shown on the subscription form, to the 
Division of Special Investments, Bureau of the Public Debt, 200 Third 
Street, P.O. Box 396, Parkersburg, WV 26102-0396. The notice may be 
submitted by fax to the Bureau of the Public Debt at (304) 480-6818, by 
mail, or by other carrier. The notice must show the account number and 
the Tax Identification Number of the government body. The notice of 
redemption must be received at the Bureau of the Public Debt by 1:00 
p.m., Eastern time on the required day.

Subpart D--Special Zero Interest Securities


Sec. 344.10  General.

    Provisions of subpart B of this part (Time Deposit Securities) 
apply except as specified in subpart D of this part. Special zero 
interest securities will no longer be issued after [date of publication 
of final rule]. All zero interest securities issued after [date of 
publication of final rule] are zero interest time deposit securities, 
subject to the rules of subpart B of this part.


Sec. 344.11  Redemption.

    (a) General. Provisions of Sec. 344.5(a) apply.
    (b) Before maturity. (1) In general. A security may be redeemed at 
the owner's option no earlier than twenty-five days after the issue 
date in the case of a certificate and thirty days after the issue date 
in the case of a note. No market charge or penalty shall apply in the 
case of the redemption of a special zero interest security before 
maturity.
    (2) Notice. Notice of redemption prior to maturity must be 
submitted, either on a designated Treasury form or by letter, by the 
official(s) authorized to redeem the securities, as shown on the final 
subscription form, to the Division of Special Investments, Bureau of 
the Public Debt, 200 Third Street, P.O. Box 396, Parkersburg, WV 26102-
0396. The notice may be submitted by fax to the Bureau of the Public 
Debt at (304) 480-6818, by mail, or by other carrier. The notice must 
show the account number, the maturities of the securities to be 
redeemed, and the Tax Identification Number of the government body. The 
notice must be received by Public Debt no less than fifteen days before 
the requested redemption date, but no more than sixty days before the 
requested redemption date. A notice of redemption prior to maturity 
cannot be canceled.

[[Page 39238]]

    Appendix A to Part 344--Early Redemption Market Change Formulas and 
Examples for subscriptions from September 1, 1989, through [date of 
publication of final rule]
    A. The amount of the market charge for bonds and notes issued 
before (date of publication of final rule) can be determined by the 
following formula:
[GRAPHIC] [TIFF OMITTED] TP26JY96.004


where:

M=Market charge
b=increased annual borrowing cost (i.e., principal multiplied by the 
excess current borrowing rate for the period from redemption to 
original maturity of note or bond over the rate for the security)
r=number of days from redemption date to next interest payment date
s=number of days in current semi-annual period
i=Treasury borrowing rate over the remaining term to maturity, based on 
semi-annual interest payments and expressed in decimals.
n=number of remaining full semi-annual periods from the redemption date 
to the original maturity date, except that if the redemption date is on 
an interest payment date, n will be one less than the number of full 
semi-annual periods remaining to maturity.
[GRAPHIC] [TIFF OMITTED] TP26JY96.005

    B. The application of this formula may be illustrated by the 
following example:
    (1) Assume that a $600,000 note is issued on July 1, 1985, to 
mature on July 1, 1995. Interest is payable at a rate of 8% on January 
1 and July 1.
    (2) Assume that the note is redeemed on February 1, 1989, and that 
the current borrowing rate for Treasury at that time for the remaining 
period of 6 years and 150 days is 11%.
    (3) The increased annual borrowing cost is $18,000. 
($600,000) x (11%-8%)
    (4) The market charge is computed as follows:
    [GRAPHIC] [TIFF OMITTED] TP26JY96.006
    

[[Page 39239]]

[GRAPHIC] [TIFF OMITTED] TP26JY96.007


    C. The amount of the market charge for certificates issued before 
[date of publication of final rule] can be determined through use of 
the following formula:
[GRAPHIC] [TIFF OMITTED] TP26JY96.008


where:

M=market charge
b=increased borrowing cost for full period
r=number of days from redemption date to original maturity date
s=number of days in current annual period (365 or 366)
i=current borrowing rate expressed in decimals (discount factor)
    D. The application of this formula may be illustrated by the 
following example:
    (1) Assume that a $50,000 certificate is issued on March 1, 1987, 
to mature on November 1, 1987. Interest is payable at a rate of 10%.
    (2) Assume that the certificate is redeemed on July 1, 1987, and 
that the current borrowing cost to Treasury for the 123-day period from 
July 1, 1987, to November 1, 1987, is 11.8%.
    (3) The increased annual borrowing cost is $900. 
($50,000) x (11.8%-10%)
    (4) The market charge is computed as follows:

[[Page 39240]]

[GRAPHIC] [TIFF OMITTED] TP26JY96.009


    Appendix B to Part 344--Formula for Determining Redemption Value 
for Securities Purchased and Early-Redeemed After [date of publication 
of final rule]
    The total redemption value for bonds and notes can be determined by 
the following two steps:
    First, accrued interest payable in accordance with Section 
344.5(a)(3)(i) is calculated using the following formula:
[GRAPHIC] [TIFF OMITTED] TP26JY96.010

and secondly, the redemption value per Sec. 344.5(a)(3)(ii) is 
calculated using the following equation:
[GRAPHIC] [TIFF OMITTED] TP26JY96.011

where:

RV=Redemption value per $100 principal
AI=Accrued interest=[(s-r)/s] x (C/2)
r=Number of days from redemption date to next interest payment date
s=number of days in current semi-annual period
i=Treasury borrowing rate over the remaining term to maturity, based on 
semi-annual interest payments and expressed in decimals
C=the regular annual interest per $100 principal
n=number of remaining full semi-annual periods from the redemption date 
to the original maturity date, except that, if the redemption date is 
an interest payment date, n will be one less than the number of full 
semi-annual periods remaining to maturity.
vn=1/(1+i/2)n=present value of 1 due at the end of n periods
an=(1 - vn)/(i/2)=v + v2 + v3 + ... + 
vn=present value of 1 per period for n periods

[FR Doc. 96-19040 Filed 7-23-96; 3:03 pm]
BILLING CODE 4810-39-P