[Federal Register Volume 61, Number 178 (Thursday, September 12, 1996)]
[Rules and Regulations]
[Pages 48338-48351]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-23331]
[[Page 48337]]
_______________________________________________________________________
Part IV
Department of the Treasury
_______________________________________________________________________
17 CFR Parts 400 and 420
Government Securities Act Regulations: Large Position Rules; Final Rule
Federal Register / Vol. 61, No. 178 / Thursday, September 12, 1996 /
Rules and Regulations
[[Page 48338]]
DEPARTMENT OF THE TREASURY
17 CFR Parts 400 and 420
RIN 1505-AA53
Office of the Assistant Secretary for Financial Markets;
Government Securities Act Regulations: Large Position Rules
AGENCY: Office of the Assistant Secretary for Financial Markets,
Treasury.
ACTION: Final rule.
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SUMMARY: The Department of the Treasury (``Department'' or
``Treasury'') is publishing final rules that establish a new Part 420
providing recordkeeping and reporting requirements pertaining to very
large positions in certain Treasury securities. The regulations are
promulgated pursuant to the Government Securities Act Amendments of
1993, which authorized the Secretary of the Treasury to prescribe rules
requiring persons holding, maintaining or controlling large positions
in to-be-issued or recently-issued Treasury securities to keep records
and file reports of such large positions. The proposed rules were
published to solicit public comment on December 18, 1995.
The recordkeeping rules require any person or entity that controls
a position equal to or greater than $2 billion in a specific Treasury
security to maintain and preserve certain records that enable the
entity to compile, aggregate and report large position information. If
the Treasury requests large position information, the reporting rules
require entities to file a large position report with the Federal
Reserve Bank of New York if their reportable position equals or exceeds
the large position threshold in a particular Treasury security as
specified by the Treasury in the notice requesting the large position
information. The Department's large position rules are intended to
provide the Treasury and other securities regulators with information
on concentrations of control that will enable them to understand better
the possible reasons for apparent significant price distortions and the
causes of market shortages in certain Treasury securities. Requests by
the Treasury for this information are expected to be very infrequent.
DATES: The effective date is October 15, 1996. Further dates: See
Secs. 420.4(a) and 420.5.
FOR FURTHER INFORMATION CONTACT: Ken Papaj, Director, or Kerry Lanham,
Government Securities Specialist, Bureau of the Public Debt, Department
of the Treasury, at 202-219-3632.
SUPPLEMENTARY INFORMATION:
I. Background
A. Statutory Authority
The Government Securities Act Amendments of 1993 (GSAA) 1
included a provision granting the Department the authority to write
rules for large position recordkeeping and reporting in certain
Treasury securities. Specifically, Section 104 of the GSAA, which
amended Section 15C of the Securities Exchange Act of 1934,2
authorizes the Treasury to adopt rules requiring specified persons
holding, maintaining or controlling large positions in to-be-issued or
recently-issued Treasury securities to maintain records and file
reports regarding such positions.3 The provision was in response
to certain market events in 1990-91 and is designed to improve the
information available to the Treasury and other regulators regarding
very large positions of recently-issued Treasury securities held by
market participants and to ensure that regulators have the tools
necessary to understand unusual conditions in the Treasury securities
market.
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\1\ Pub. L. 103-202, 107 Stat. 2344 (1993).
\2\ 15 U.S.C. 78o-5.
\3\ Pub. L. 103-202, Sec. 104; 107 Stat. 2344, 2346-2348; 15
U.S.C. 78o-5(f).
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The GSAA gives the Department wide latitude and discretion in
determining several key features and conditions that would form the
underpinnings of the large position recordkeeping and reporting rules.
Among the most significant of these features are: defining which
persons (individually or as a group) hold, maintain or control large
positions; determining the minimum size of positions to be reported;
determining what constitutes ``control'' for the purposes of the rules;
prescribing the manner in which positions and accounts are to be
aggregated; identifying the types of positions to be reported;
determining the securities that would be subject to the rules; and
developing the form, manner and timing of reporting. Both the proposed
and final rules address these points.
B. Participation in Rulemaking Process/Solicitation of Comments
Throughout the process of developing large position rules, the
Department has sought the views of the market participants who would be
directly affected by such regulations. We believed that market
participant involvement in the rulemaking initiative from its outset
would facilitate greater understanding of, and support for, the final
rules when implemented. Due to the potential complexity of the rules
and the myriad of ways to approach them, we sought advice and initial
comment on a variety of conceptual approaches to designing a large
position recordkeeping and reporting system.
Accordingly, the Department issued an Advance Notice of Proposed
Rulemaking (ANPR) on January 24, 1995.4 The ANPR addressed several
key issues, concepts and approaches to be considered in developing
large position recordkeeping and reporting rules and solicited
comments, suggestions and recommendations regarding how the
requirements should be structured. The ANPR also contained a detailed
historical background that provides a fuller understanding of the
events and circumstances that resulted in the establishment of this
regulatory authority, the purposes and objectives to be achieved from
large position rules, and the Congressional intent behind this
legislation. The comment period on the ANPR ran through May 24,
1995.5 In response to the ANPR, the Department received seven
comment letters which were summarized in the preamble to the proposed
rules.6 Rather than repeating that information here, readers are
referred to the proposed rules for a discussion of the comments.
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\4\ 60 FR 4576 (January 24, 1995).
\5\ 60 FR 20065 (April 24, 1995).
\6\ 60 FR 65214 (December 18, 1995).
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C. The Proposed Rules
The Department published for comment proposed large position
recordkeeping and reporting rules on December 18, 1995.7 The
proposed rules were designed to strike a balance between achieving the
purposes and objectives of the statute and minimizing costs and burdens
to those entities affected by the regulations. The proposed rules
required reports to be submitted only in response to a specific request
by the Treasury for large position information on a particular Treasury
security issue. Using this approach, reporting would be an infrequent
event required primarily in response to pricing anomalies in a specific
Treasury security rather than a regular, on-going process resulting
from a certain pre-determined large position threshold being exceeded
in a broader range of securities.
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\7\ Ibid.
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The proposed rules provided a minimum large position threshold of
$2 billion, below which the Treasury would not request large position
reports.
[[Page 48339]]
As a result, very few entities would be required to file large position
reports. The proposed recordkeeping requirements would generally not
apply to any reporting entity (as defined in the rules) that did not
control a position that equalled or exceeded $2 billion in a Treasury
security. For those entities currently subject to recordkeeping rules
of the Securities and Exchange Commission (SEC), the Treasury or the
bank regulatory agencies, the proposed rules would have imposed only
minor additional recordkeeping requirements and only if certain
conditions were present. Finally, the proposed rules incorporated
several concepts from the Treasury's auction rules (e.g., positions to
be included in a reportable large position, definition of a reporting
entity and method of aggregating positions) which have been in effect
since March 1993 and are understood by many of the major participants
in the Treasury securities market.8
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\8\ Uniform Offering Circular for the Sale and Issue of
Marketable Book-Entry Treasury Bills, Notes, and Bonds; 31 CFR
Chapter II, Subchapter B, Part 356.
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In addition to considering the views expressed by the commenters to
the two rulemaking proposals, Department staff has also consulted with
various regulatory agencies (i.e., staff of the SEC, the Commodity
Futures Trading Commission, the Board of Governors of the Federal
Reserve System and the Federal Reserve Bank of New York (FRBNY)) in
developing the ANPR, the proposed rules and these final rules.
D. Scope of Large Position Rules
It is important for all market participants to recognize that large
position rules create a requirement to maintain records and report
information about such positions. However, these requirements apply
only to entities that hold or control (i.e., exercise investment
discretion over) very large positions, as determined by the Department,
in specific Treasury security issues. Accordingly, there is no
obligation on executing brokers and dealers to report large trades nor
is there an affirmative duty to inform their customers of the large
position recordkeeping and reporting requirements prescribed by this
rulemaking.
The Department emphasizes that large positions are not inherently
harmful and there is no presumption of manipulative or illegal intent
on the part of the controlling entity merely because a position is
large enough to be subject to these rules. In addition, the rules do
not establish trading or position limits or require the identification
of large traders or the reporting of large trades. Finally, the GSAA
specifically provides that the Department shall not be compelled to
disclose publicly any information required to be kept or reported for
large position reporting. In particular, such information is exempt
from disclosure under the Freedom of Information Act (FOIA).9
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\9\ 5 U.S.C. 552(b)(3)(B).
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II. Comments Received in Response to Proposed Rules
As discussed in the ANPR 10 and the proposed rules,11 the
Department made the decision, early on, to obtain the views of the
market participants who would be directly affected by such regulations.
In the proposed rules, which addressed and incorporated those comments
received in response to the ANPR, the Department strongly encouraged
market participants to submit comments, including any suggestions for
reducing burdens on the industry while still achieving the objective of
the rules.
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\10\ See supra note 4.
\11\ See supra note 6.
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In response to the proposed rules, the Department received thirteen
comment letters. The letters were submitted by four trade associations,
three primary government securities dealers, four bank holding
companies (including two primary dealers), and one mutual fund
manager.12 The Department has carefully considered the comments
that were received, which generally supported the approach and process
adopted in the proposed rules. Each comment letter did not necessarily
address all aspects of the proposed rules.
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\12\ Public Securities Association (two letters); Investment
Company Institute; British Bankers' Association; London Investment
Banking Association; Goldman, Sachs & Co.; J.P. Morgan Securities,
Inc.; HSBC Securities, Inc.; Bank of America; Chemical Banking
Corporation; Norwest Corporation; BANC ONE Corporation; and Fidelity
Management & Research Co., respectively.
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The comments have been summarized and organized into the following
eight basic categories: Control and the Definition of a Reporting
Entity; Reporting Threshold; Time Frame for Submitting Reports;
Reportable Position Components; Report and Recordkeeping
Certifications; Recordkeeping; Announcement of a Request for Reports;
and General Commentary.
A. Control and the Definition of a Reporting Entity
Eight comment letters specifically addressed this issue. While the
comments were generally in agreement with the definition of control as
proposed, the concept of control premised on an entity's investment
discretion, and defining a reporting entity or a separate reporting
entity under a requested ``carve out'' in conformity with the single
bidder process in the uniform offering circular, four letters had
specific recommendations.
One commenter expressed concern about the timing and aggregation
requirements given the definitions of ``control'' and ``entity'' and
believed that it would be difficult to aggregate all of its holdings
within the proposed reporting time frame. This commenter recommended
that the definition of ``reporting entity'' be limited to a legal
entity that exercises independent investment discretion, believing that
if a narrower definition were adopted then their concerns would be
eliminated. The second commenter, while agreeing with the concept of
control premised on investment discretion, suggested that a participant
be allowed to exclude from its reportable position those securities for
which the entity has investment discretion but which do not exceed a
minimum threshold. This approach, which would be similar to the net
long position reporting requirement in the uniform offering circular,
permits bidders to exclude amounts in non-bidding controlled accounts
under a certain threshold from their reporting requirement. This
commenter asserted that this exclusion would significantly alleviate
the burden in tracking amounts of the security subject to investment
discretion.
The third letter, in specifically commenting on the application for
separate reporting status, similar to the separate bidder application
incorporated in the uniform offering circular, recommended that
Appendix A of the rules be changed to encompass organizational
components previously recognized under the uniform offering circular's
definition. The fourth commenter expressed concern with the various
distinctions being drawn among reporting entities, aggregating entities
and separate reporting entities, stating that this will cause a myriad
of problems for complex and changing financial services businesses. The
commenter proposed that a narrower reporting population be defined,
such as those business units which are the primary bidders for, and
proprietary traders in, U.S. government securities. Within these
groups, the commenter suggested excluding those securities that are not
held for proprietary trading. This commenter further suggested an
alternative approach which would not require the aggregation of
positions, where the different business units within a firm are clearly
independent,
[[Page 48340]]
while excluding all business units where securities are held as long-
term investments.
B. Reporting Threshold
Seven letters directly addressed the proposed $2 billion minimum
large position threshold. Two of the seven commenters believed this
threshold to be an appropriate level, with one of these commenters
suggesting that the rules specifically provide that the threshold be
raised from time to time based on market developments. Three other
commenters stated that by including gross financing positions in the
total reportable position, all primary dealers and large market
participants would trigger the $2 billion threshold and effectively be
required to report their positions in all instances, due to their
matched repo book and other financing activity, thereby resulting in
numerous reports. Given these large matched book positions, one of the
three commenters advocated that this threshold be increased to $5
billion, while another suggested that the reportable position be based
on the participant's net financing position. The third commenter, while
also advocating a significant increase in the threshold, went further
by recommending two other alternative approaches. In the first
approach, the $2 billion threshold would be triggered by the aggregate
of the net trading position and the net fails position, excluding the
gross financing position. The second alternative approach would provide
participants with the option of netting the gross par amounts of
securities received in financing transactions against the gross par
amount of securities delivered with the same term to the same
counterparty. In both approaches, the commenter stated that this would
only be to determine if a firm had crossed the threshold. Once it was
determined that the firm was subject to reporting, then its gross
financing positions would be reported to provide for a full range of
large position information.
The sixth letter, focusing on those large firms that operate in
foreign markets, represented that even if the normal activity of a
participant was below the threshold, if the participant was a part of a
group of affiliates, it may be subject to the reporting rules. The
commenter went on to state that foreign affiliates, however minimal
their activity, would need to report information to the designated
filing entity unless they qualified for, and received, separate
reporting status. This commenter, and a seventh commenter which
supported increasing the minimum threshold, suggested that the process
could be simplified by setting a minimum threshold for each aggregating
entity below which the entity's position would not need to be included
in the reporting entity's report.
C. Time Frame for Submitting Reports
Only one of the thirteen comment letters did not specifically
address the subject of the proposed reporting time frame in which
reports must be submitted once an announcement for large position
information on a particular security is made by the Treasury. All
twelve letters basically stated that the proposed one and one-half
business day time frame was too short given the enormity of the data
that would need to be gathered, reviewed and aggregated. These letters
suggested that a longer period would seem more appropriate based on the
effort required to compile the information, the fact that current
requirements do not require holdings to be aggregated at a reporting
level, and the time needed for participants with large international
presences to gather the data from worldwide affiliates, especially
given the different time zones. One commenter recommended extending
this turnaround time to at least three business days. Others suggested
four or five business days while several commenters recommended that a
minimum of ten business days would be appropriate. Commenters noted
that a turnaround time frame of ten business days is the same as that
for large position rules in place for the equities securities market
(i.e., 13d filings) and is the same as that for the SEC's proposed
large trader reporting rules.
One of the commenters, while not recommending a specific time
frame, suggested that even a ten business day turnaround would be
insufficient. This letter proposed several alternatives to balance the
need to collect information quickly and the burdens on the reporting
entity. The commenter suggested that an initial or ``first cut'' report
of summary positions be prepared which would contain less precise
information. Possible alternatives would be to subsequently provide a
breakdown of the various components upon request; or, accept an initial
report with only trading, reverse repo, and securities borrowed
positions, with additional information to follow in a longer time
frame; or, permit U.S.-based entities to report first, with information
regarding foreign holdings to follow upon request; or, permit filing of
partial reports to address situations where an aggregating entity does
not have its reportable position ready in time.
Another commenter, while recommending a time frame of not less than
ten business days if the reportable position includes all securities
received in pledge and in other collateralized transactions, also
advocated the implementation of a phased reporting system where
participants would provide certain information in less than ten
business days, with the balance of the required information to be
provided by the tenth business day. This commenter went on to state
that many participants would be able to report their net trading
positions for all aggregating entities within five to seven business
days. One commenter requested that the final rule specifically provide
that the reporting entities could amend a filing if the original
reported information was inaccurate.
D. Reportable Position Components
Eleven of the thirteen comment letters addressed the subject of the
composition of a reportable position. Certain commenters generally
supported including in the total reportable position the selected
components as proposed, such as net forward and net fails positions.
However, the majority of commenters objected to how certain aspects of
the net trading and gross financing positions were to be included or
whether they should even be included in the total reportable position.
For example, two commenters specifically objected to a separate
reporting of the net trading position components since, as stated by
one of these commenters, separate reporting serves no useful purpose
because all these positions represent control. Both commenters stated
that the positions should be reported as of trade date, not settlement
date. These same commenters stated that those securities received under
overnight repos should be excluded from the reporting and recordkeeping
obligations since investment advisers do not exercise effective control
over them, they are not rehypothecated, and a significant portion of
these transactions are tri-party repos where the counterparties
typically have the right of substitution.
The inclusion of securities received in pledge as collateral for
margin loans, swap transactions, and other collateralized credit
extended in the gross financing position generated the most comments
from those that addressed the reportable position's components. Nine
comment letters responded similarly that these pledged securities
should be excluded from being reported in the gross financing position.
The commenters stressed there are minimal policy benefits to be
[[Page 48341]]
derived by including them and that this information would be of
marginal utility. The inclusion of these securities is based on the
premise that the pledgee maintains control. However, the commenters
stated that firms do not control those securities received in pledge
since the pledgor often has the right to substitute them in accordance
with the market practice of pledging general collateral rather than
specific securities identified by particular CUSIPs (i.e., a unique
identifying number assigned to each separate security issue and
separate STRIPS component). The letters also stressed that most firms
or market participants do not have a systematic method for aggregating
these positions firm-wide and do not possess the operational capacity
or systems to track those securities pledged by CUSIP. It was argued
that it would be prohibitively expensive to design and implement
systems and procedures to track these pledged securities by CUSIP. Two
letters, in particular, stressed that if these securities received in
pledge and securities in other collateralized transactions were to be
included in the final rules then market participants should continue to
be provided the option to exclude the securities collateral over which
the pledgor retains the right to substitute or which is subject to
third party custodial relationships. Further, the amount of such
exclusions should not be required to be reported separately in a
memorandum entry in the report. One letter stated that the rules should
allow for the netting of repos and reverse repos when the counterparty
is a primary government securities dealer.
Two commenters requested further clarification on different
position components. One of the letters stated that while fails should
be included in a reportable position, the rules should clarify that
fails are not included in the calculation for the cash/immediate net
settled position. The second letter requested clarification on the
treatment of forward start repos and reverse repos, believing that they
should be included in the gross financing position. This commenter also
requested clarification that fails to receive or fails to deliver would
not be included in the cash/immediate net settled position since this
would avoid double counting in the reports. This letter suggested that
fails be treated similarly to forwards and that fails should be able to
be netted with other components as either a positive or negative
number. This commenter suggested amending the proposed rules to permit
net fails to be less than zero.
E. Report and Recordkeeping Certifications
Six letters specifically commented on the proposed report and
recordkeeping certifications and essentially objected to, or would find
problematic, the requirement that only certain senior executives would
be permitted to sign the report and certify the adequacy of the
reporting entity's recordkeeping system. It was recommended that the
rules be broadened to provide that others, such as the chief legal or
compliance officers, or individuals authorized by the designated filing
entity, be able to sign the reports and recordkeeping certifications.
This approach would be consistent with the requirement under Section 13
of the Securities Exchange Act of 1934.
Three letters, in particular, expressed concern about the
obligations and responsibilities with respect to the certifications
that must be given by the designated filing entity on behalf of the
reporting entity and its aggregating entities. It was recommended that
the certifications in the final rules specifically permit the
designated filing entity to rely on certifications or other reasonable
bases of evidence of the accuracy of the information as provided by the
aggregating entities.
F. Recordkeeping
Five letters directly addressed the proposed recordkeeping
requirements. Two of these letters objected to applying the rules to
those entities that had a large position at any time during the two-
year period ending ninety days after publication of the final rules
since the reviews of records to determine whether a large position was
held would be an extensive, time consuming, and very costly process and
would amount to a retroactive application of a new requirement. It was
recommended that if this requirement were retained, entities be given
the option of certifying or notifying the FRBNY that the holding of a
large position is based on the entity's general knowledge of past
investment and trading activities, without actually reviewing their
records to document this fact. Another two letters specifically
commented on the imposition of a significant recordkeeping burden on
unregulated aggregating entities. Both letters stressed the view that
this additional compliance burden, with these unregulated firms having
to design and implement recordkeeping systems, may cause certain
entities to either re-evaluate or curtail their participation in the
Treasury market. One letter suggested that these unregulated entities
be excluded from these requirements.
G. Announcement of a Request for Reports
Five letters addressed the issue that the Treasury would annually
test the reporting of large positions by requesting reports. Four
letters recommended that when this request for large position
information is made, the Treasury should notify market participants
that it is a test. This is because some participants will assume that
all such requests are real and their reactions may create price
anomalies where none existed. One letter, in particular, stressed that
advising market participants that the request is a test would not cause
firms to be less diligent in complying with the rules and that firms
would in every case have a legal obligation to submit the required
information in a timely and accurate manner.
One letter recommended that the start of the response period, in
which the reports would be required to be submitted, should be
triggered by publication of the announcement in the Federal Register,
which would provide more certainty than a press release, that the
notice was received. Another letter, from a trade association,
suggested that while they support the issuance of a press release and
publication in the Federal Register, they would also like to be
immediately notified when the release is provided to third party wire
services so that they can redistribute the notice to their members.
H. General Commentary
Nine of the thirteen comment letters expressed general support for
the proposed rules and the desired effect to prevent and detect market
manipulation. Specifically, the letters supported the approach taken in
providing for a $2 billion reporting threshold, an on-demand reporting
system where reports are required to be submitted in response to
infrequent requests, and relying on records that are already required
to be maintained. Three of the nine letters stated that certain
features of the proposed rules would be overly burdensome and pose
compliance problems.
One commenter agreed that the proposed rules strike the appropriate
balance between achieving the purposes of the statute and minimizing
the costs to the affected entities. Another commenter, while generally
supportive, strongly objected to the Treasury reserving the right to
collect information on securities issues that are older than those
specified, since accommodating
[[Page 48342]]
historical information requests would impose significant cost burdens
and business disruptions. A third commenter suggested that the FRBNY
adopt an appendix to the final rules that would identify acceptable
submission methods. A fourth commenter reiterated the view it expressed
in response to the ANPR that the particular features of the Treasury
bill market make it difficult to accumulate a concentration in these
issues. A fifth commenter stated that the final rules should explicitly
include a provision providing that any information required to be kept
or reported will be exempt from FOIA and provided confidential
treatment given its concern that the Treasury, in following up on a
report, would seek the names of its advisory clients. This same
commenter also stated that it does not believe that the GSAA provides
the Treasury with the authority to request information on securities
issues older than those defined as recently-issued and, therefore, this
provision should be eliminated.
Three commenters opposed the application of the large position
rules to foreign firms. One letter expressed the commenter's belief
that there are complications for those firms operating in foreign
markets and that the proposed rules raise concerns about the potential
effect on the liquidity of the government securities market. This
commenter stated that the recordkeeping requirements and open-ended
obligation to file large position reports could make Treasury
securities less attractive to foreign participants, many of whom
structure their business so as not to bring themselves under direct
U.S. regulation. This letter further urged that the issuance of the
final rules be delayed until the Treasury is absolutely certain that
these rules meet the stated goal. Another commenter, in addition to
expressing concerns with compliance costs (particularly for major
European financial conglomerates), raised the issue of the extension of
extra-territorial regulation by U.S. authorities. It was this
commenter's belief that the extra-territorial application of the rules
would be unwarranted in principle and unworkable in practice and would
``aggravate problems over the trade in services.'' The commenter
suggested that an alternative approach would be to rely more on
memoranda of understanding (MOUs) with European supervisors and less on
regulations. This letter further questioned the enforcement capacity
with which U.S. authorities would have to enforce the regulations
outside national jurisdiction, in the context of large foreign
conglomerates. To this extent, the commenter recommended a narrower
definition of the reporting population.
A third commenter stated that the extra-territorial scope of the
large position rules should be modified, particularly with respect to
firms domiciled in countries where foreign regulators have MOUs with
U.S. authorities. This commenter stated that the Treasury should
explore the possibility of obtaining large position information from
the foreign regulatory authorities rather than directly from the firms.
It was represented that this process would ``build on * * * the
increasing and important trend of enhancing cooperation between
regulators in the securities markets * * *.'' This commenter further
stated that large position reporting may not be needed at all for firms
based in foreign jurisdictions which have rules in place to prohibit
market manipulation.
III. Section-by-Section Analysis of Changes in Response to Comments
A. Section 420.1--Applicability
In preparing the applicability section of the final rules, one
change was made from the proposed rules. The change provides a total
exemption from the large position rules to foreign central banks,
foreign governments and international monetary authorities (e.g., World
Bank) (collectively, foreign official organizations). The proposed
rules had provided these entities a partial exemption from the rules
limited to the portion of their positions maintained at the FRBNY. In
response to the ANPR, the Treasury had received comments (from the
FRBNY and the Investment Company Institute) on the regulatory treatment
of these organizations and public comment was specifically requested on
the approach taken in the proposed rules. No further comments were
received.
The Department has determined to grant the foreign official
organizations a total exemption after careful consideration of the
costs and benefits resulting from subjecting them to large position
rules. The Treasury believes that attempting to regulate these entities
would create significant potential legal and practical problems.
Additionally, for the infrequent occasion when foreign official
organizations may control a large position in a Treasury security, this
information is likely to be available from other sources. Accordingly,
the Treasury perceives very little benefit to be obtained from
regulating the foreign official organizations in relation to the costs
that would be incurred. It is for this reason that they are being
granted a full exemption.
The exemption provided to foreign official organizations does have
one limitation. To the extent that such an organization has an
ownership interest in an entity that engages primarily in commercial
transactions (e.g., a nationalized commercial bank), the exemption does
not extend to that entity. This limitation is designed to provide
equivalent treatment to all commercial market participants regardless
of their ownership structure.
Three commenters objected to the applicability of the rules to
foreign firms (i.e., foreign private financial enterprises). Two argued
that the extra-territorial application of the rules by U.S. regulators
would be either unwarranted in principle and unworkable in practice or
unnecessary for many foreign firms since they are already subject to
the rules of their domestic supervisor prohibiting market manipulation.
The commenters recommended that, in lieu of an extra-territorial
application of the rules, Treasury: (1) Rely more on MOUs with foreign
regulators to obtain needed information, and (2) define a narrower
reporting population for the rules (e.g., only business units that are
primary bidders for, and proprietary traders in, Treasury securities).
Treasury has considered the problems related to the ability of U.S.
regulators to obtain large position information from foreign investors.
As a result, Treasury expects that U.S. regulators will continue to
cooperate with foreign securities regulators through MOUs and other
means when and if such actions become necessary. It is impractical to
exempt foreign investors from the large position rules since the
potential exists for these entities to amass large positions in
Treasury securities, and further, the granting of such an exemption
could cause U.S.-based entities to move their securities holdings
overseas to foreign firms. Accordingly, the Treasury has decided to
retain the requirement that foreign private financial enterprises be
subject to the large position rules.
The commenters also asserted that compliance costs for foreign
firms--especially European financial conglomerates--would be
considerable. The Treasury believes that the changes made to the
proposed rules, as explained in the remainder of this section of the
preamble, together with the fact that the on-demand reporting system
does not require aggregation of positions on a daily basis, will
facilitate the ability of affected firms, including foreign firms, to
comply with the rules
[[Page 48343]]
without incurring substantial compliance costs.
B. Section 420.2--Definitions
Comments were received on paragraph 420.1(d) of the proposed rules,
which reserves the Treasury's right to collect information on certain
Treasury securities which do not meet the regulatory definition of
``recently-issued'' but reporting on them would be consistent with the
purposes of the GSAA. The commenters believed that such a reservation
of rights was beyond the scope of the Treasury's authority. The purpose
of the provision was to provide notice to market participants that,
while the definition of ``recently-issued'' narrowed the routine
coverage of the large position rules to a small universe of securities,
the authority provided to the Treasury by the GSAA is broad enough to
be applied to a larger group of securities and that, in certain rare
circumstances, the Treasury may choose to invoke this broader
authority. Treasury continues to hold this view.
After consideration of these comments, and to make clear that
``recently-issued'' is not limited by statute to the two or three most
recent issues of a security, the Department has removed paragraph
420.1(d) but revised the definition of ``recently-issued'' in paragraph
420.2(g) of the final rules. The revision adds a new subparagraph (5)
to the definition of ``recently-issued'' to include Treasury security
issues older than those specified in subparagraphs 420.2(g)(1) and (2)
where the large position information is necessary and appropriate for
monitoring the impact of concentrations of positions in Treasury
securities. As discussed in the preamble to the proposed rule,13
the Treasury believes that this authority to request large position
information on older security issues would only be used in exceptional
circumstances. One example is the April and May 1991 two-year Treasury
note squeeze situations in which these securities remained of concern
to the Treasury beyond the time that would otherwise have been covered
by the definition of ``recently-issued'' in subparagraphs 420.2(g) (1)
and (2). It is not the Department's intention to gather information on
securities that have been outstanding for an extended period of time.
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\13\ 60 FR 65214, 65217 (December 18, 1995).
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The definition of gross financing position, paragraph 420.2(c), was
the subject of a number of comments principally on two different
aspects of the proposed definition; the inclusion of securities
collateral and the scope of the optional exclusion. As previously
described in Section II.D., many commenters were particularly concerned
about the broad scope of the definition of the gross financing
position. As proposed, the gross financing position included amounts of
a security received from any financing transaction, including
collateral for commercial loans or financial derivatives. Commenters
represented that compliance with the extensive reach of this position
component would be unduly burdensome and for a large, diversified
reporting entity could not be calculated within the provided reporting
time frame. Some of the commenters stated that in order to calculate
the gross financing position they would have to develop automated
systems at substantial cost. The commenters did not object to the
treatment of security financing transactions such as reverse repurchase
agreements and bonds borrowed.
After reviewing the comments, the Department has determined to
limit the scope of the gross financing position. Specifically, all
commercial lending transactions that include Treasury securities as
collateral will be excluded from the gross financing position. These
transactions include financings such as lines of credit, general
purpose business loans and other securitized loans unrelated to
activities in the financial markets. This change should greatly
simplify the computation of the gross financing position for entities
such as large commercial banks that extend secured commercial credit
from a large number of locations and do not maintain a centralized
register of the specific collateral for these transactions.
In preparing the final rules, the Treasury carefully considered the
commenters' further objections to the inclusion of securities received
as collateral for financial derivatives such as swap agreements. The
commenters represented that since these activities are generally
conducted in unregulated affiliates of regulated entities, there are
few standardized systems for tracking the specific collateral obtained
and that creating an obligation to determine whether a specific
security is held as collateral in a very short time frame, even on an
on-demand basis, would require the development of extremely expensive
automated systems. The Department weighed these arguments against the
potential importance of this information in ascertaining control of a
particular security and decided that the benefits of including them
were greater than the burdens to market participants. Factors affecting
this decision were the growing popularity of collateral structures for
financial derivatives, the practical similarities between these
structures and reverse repos and bonds borrowed transactions, as well
as the fact that large market participants that would be affected by
the large position rules already have non-integrated systems for
tracking this collateral to conduct daily mark-to-market calculations
and to determine the sufficiency of the collateral. Additionally, as is
discussed later in the preamble, the Department has also determined to
extend the reporting time frame. Accordingly, a Treasury security that
has been received as collateral for a financial derivative transaction
or other securities transaction (e.g., margin loan) must be included in
the gross financing position.
In response to the proposed rules, commenters also noted that the
optional exclusion provided in the definition of gross financing
position for transactions in which securities were transferred without
effective control was restricted to only some financing transactions.
The Department is sympathetic to this concern and is revising the
definition in paragraph 420.2(c) in the final rules to permit the
optional exclusion to be available on the same terms for any collateral
transaction in which securities are received. The circumstances in
which control is deemed to not exist--the right to substitute
securities, a third party custodial relationship or hold-in-custody
agreements--remain unchanged from the proposal. Extension of the
exclusion to all components of the gross financing position should
further mitigate the impact of including financial derivatives
collateral in the definition since many of these agreements provide for
the right to substitute securities.
As a clarifying point in response to one commenter, the Department
notes that forward start reverse repo transactions are to be included
in the gross financing position just as forward settling trades are in
the net trading position.
While the Department is not revising the definition in paragraph
420.2(d) of large position threshold, it emphasizes that the $2 billion
level is only an absolute minimum reporting level. The Treasury wishes
to reiterate that, while the $2 billion threshold triggers the
recordkeeping requirements pursuant to section 420.4, no reporting
burden is created until the Treasury issues a notice for information on
a specific security. The Treasury envisions that the level specified in
any actual request for large position information would most likely be
significantly in excess of $2 billion and would, therefore, affect
[[Page 48344]]
only a small number of entities. Accordingly, no change is being made
to the definition.
Comments were specifically requested on the treatment of fails in
the composition of a reportable position. The only negative comments
received on this component suggested that the net fails position be
permitted to be a negative number. The Department has decided to retain
the current restriction that the net fails position should be reported
as zero if it is negative. Fails to deliver that exceed fails to
receive should not be used to reduce the size of a reportable position
because their size is, to a great extent, controllable by the reporting
entity. The Department also wishes to clarify that fails are not to be
included in the net trading position and, therefore, are not double
counted in computing a reportable position.
In paragraph 420.2(f), the definition of net trading position, the
Department requested comment on the proposed treatment of forward
settling positions. The comments that were received on this issue were
supportive of the proposed treatment. Accordingly, no change has been
made to the treatment of forward settling positions in the net trading
position. As a reminder, all the components of a reportable position
are to be computed on a trade date basis.
One commenter requested that the criteria for designation of a
separate reporting entity within the definition of a reporting entity,
paragraph 420.2(i) and Appendix A, be modified to parallel more closely
the criteria for designation as a separate bidder in the uniform
offering circular. 14 Specifically, the commenter asked that
organizational components within an entity be permitted to establish
themselves as separate reporting entities as they are permitted to be
separate bidders in the uniform offering circular. To ensure
consistency between the uniform offering circular and the large
position rules, the Department has made a clarifying change to the term
aggregating entity as defined in paragraph 420.2(a) and as used in
Appendix A of the large position rules. These revisions clarify that an
organizational component (e.g., a bank trust department) falls within
the definition of aggregating entity and may be recognized as a
separate reporting entity. Appendix A has been further revised to
clarify that any entity, including an organizational component thereof,
that has already received recognition from the Treasury as a separate
bidder in Treasury auctions pursuant to the uniform offering circular
is also recognized as a separate reporting entity without requesting
such status. However, the separate reporting entity must continue to
abide by the conditions set out in the uniform offering circular that
are required for recognition as a single bidder, which parallel the
conditions set out in Appendix A of the large position rules for
recognition as a separate reporting entity.
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\14\ 31 CFR 356 Appendix A.
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C. Section 420.3--Reporting
1. On-Demand Reporting System
The on-demand reporting system approach that the Treasury proposed
for filing large position reports received overwhelming support from
the commenters. In an on-demand reporting system, large position
reports are required to be prepared and filed only in response to a
notice from the Treasury requesting large position information on a
specific issue of a Treasury security by those reporting entities whose
positions exceeded the large position reporting threshold specified in
the notice.
Nine of the twelve organizations that submitted comment letters
addressed the on-demand reporting requirement and all of them supported
the proposed reporting method in which large position reports would be
submitted only in response to a specific, infrequent request by the
Treasury. The commenters agreed with the Treasury's assessment that an
on-demand reporting system would be significantly less costly and
burdensome than a regular reporting system. An on-demand system would
target the reporting to a specific issue of a Treasury security in
response to price distortions or market anomalies, while still
achieving the legislative and policy goals of strengthening the ability
of the regulatory agencies to deter possible manipulation of the
Treasury securities market. Thus, the on-demand approach is essential
to the Treasury's overall commitment to design rules that strike an
appropriate balance between achieving the purposes and objectives of
the statute and minimizing costs and burdens to those entities affected
by the regulations. Accordingly, the on-demand reporting requirement in
paragraph 420.3(a) is being adopted without change from the proposed
rules.
2. Notice Requesting Large Position Reports
Another of the provisions of paragraph 420.3(a) identifies the
information that will be provided in the notice that will be issued by
the Treasury (i.e., press release and subsequent Federal Register
notice) requesting the preparation and submission of large position
reports. Paragraph 420.3(a) is being modified to indicate that the
notice will also contain, where applicable, identification of the
STRIPS principal component that is related to the specific Treasury
security issue for which large position information is being requested.
This information is being added because the STRIPS principal component,
which must be reported as part of the net trading position, has a
different security description and CUSIP number from the related
Treasury note or bond that would be the subject of the Treasury's
request for information.
The preamble discussion to the proposed rules indicated that the
Treasury notice requesting large position information would be provided
to major news and financial publications and electronic financial wire
services for subsequent dissemination, and published in the Federal
Register.15 This procedure was proposed because we believe that
the press release requesting large position information would be given
wide and timely distribution without undue delay in the same manner as
Treasury offering announcements and auction results. However, the
Public Securities Association (PSA) has expressed concern about relying
on the press for notification of the large position information request
and that some entities may not have access to the particular wire
service carrying the notice. For these reasons, the PSA has requested
that the Treasury provide it with a facsimile copy of the notice so
that the PSA can immediately notify its members of the reporting
obligation. To facilitate broad and timely dissemination of the notice,
Treasury will provide the PSA with a copy of the press release at the
time it is issued. The Treasury will similarly make a copy of the
notice available to other industry or trade associations at their
request.
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\15\ Since the Federal Register is the designated federal
publication for providing official notice, publishing the Treasury
notice in that publication is legally sufficient for ``constructive
notice'' of the request.
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3. Information Required in Large Position Reports
--Net Trading Position
Paragraph 420.3(c), together with Appendix B, details the specific
information that must be provided in the large position information
reports. In the proposed rules, paragraph 420.3(c)(1) identified the
specific component positions of the total reportable position that must
be reported by the reporting entity. For the
[[Page 48345]]
net trading position, which is one of three positions that constitute
the total reportable position, the proposed rules required each of the
following five components to be listed in the large position report:
(1) Cash/immediate net settled positions; (2) net when-issued positions
for to-be-issued and reopened issues; (3) net forward settling
positions, including next day settling positions; (4) net positions in
futures contracts that require delivery of the specific security; and
(5) net holdings of STRIPS principal components of the security.
Two commenters objected to the requirement that each of the five
components of the net trading position be reported separately since the
only difference among these items is their settlement date. One of
these commenters also stated that the separate reporting of the net
holdings of STRIPS principal components of a security does not appear
to be necessary. In response to the comments and also to reduce the
amount of information that must be included in the large position
report, we are revising the final rules to eliminate the separate
reporting of the five components that comprise the net trading
position. Reporting only the total net trading position, rather than
each of the five components, is also consistent with the way the net
long position is reported under the Treasury's auction rules.16
Accordingly, paragraph 420.3(c)(1) has been revised to require a
reporting entity to report only its net trading position, gross
financing position, net fails position and the total reportable
position, which is the sum of the three positions. However, Treasury or
FRBNY staff may require, as a follow-up inquiry pursuant to paragraph
420.3(e), a reporting entity to provide the amount of each component
that constitutes the net trading position. Reporting entities must make
good faith efforts to respond to such inquiries and provide any
additional information requested in a timely manner.
---------------------------------------------------------------------------
\16\ 31 CFR 356.13(b).
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--Gross Financing Position
The gross financing position is the second of three positions
constituting the total reportable position that must be included in the
large position report pursuant to paragraph 420.3(c)(1) of the final
rules. As discussed at length in Sections II.D. and III.B. of this
preamble, the gross financing position was the subject of extensive
comments regarding the inclusion of securities collateral in the
position, the scope of the voluntary exclusion that permitted firms to
reduce the gross financing position by the amount of securities
received over which they did not have effective control, and the
requirement to report the amount of the voluntary exclusion as a
memorandum entry. Section III.B. discusses how the definition of gross
financing position is being modified to narrow the scope of
transactions that are covered and how the voluntary exclusion is being
expanded to cover all components in the gross financing position. No
changes to paragraph 420.3(c)(1) are necessary to address these issues.
However, the Treasury has changed the provision in paragraph
420.3(c)(2) of the proposed rules that would have required the amount
of the voluntary exclusion to be reported. Entities that would have
taken advantage of the voluntary exclusion would have been required to
report the amount of the exclusion in Memorandum #2. The Treasury
agrees with the commenters who stated that requiring this memorandum
entry would impose additional burdens, thus negating the benefits that
would be derived from exercising the voluntary exclusion. As a result,
the Treasury is revising paragraph 420.3(c)(2) in the final rules by
deleting the requirement to report Memorandum #2--the amount excluded
from the gross financing position--in the large position report.
--Net Fails Position
Regarding the net fails position, which is the third component of
the total reportable position, two commenters requested clarification
that fails should not be included in the cash/immediate net settled
position component of the net trading position. The Department concurs
with the views expressed by the commenters and reiterates the
clarification it made in the preamble to the proposed rules that
positions remaining unsettled after their scheduled settlement date are
not to be included in the computation of the net trading position. As
discussed earlier, the final rules adopt without change the treatment
of the net fails position as proposed, i.e., net fails must be reported
either as a positive number or zero.
--Trade Date Reporting
Paragraph 420.3(c)(3) has been revised with technical and
conforming changes. Language has been added to this provision to state
explicitly that all position amounts on the large position report
should be reported on a trade date basis. Since two commenters stated
that positions should be reported as of trade date rather than
settlement date, we believe this revision to the final rules will
eliminate any confusion or misunderstanding regarding this issue.
A conforming change is also being made to paragraph 420.3(c)(3) to
reflect that the net trading position should be reported as one net
number rather than reporting each of the five net trading position
elements. See the discussion above in the section entitled Net Trading
Position.
--Supplemental Information
As described in the proposed rules, paragraph 420.3(e) requires
that a reporting entity provide, in response to a request from the
FRBNY or the Treasury, information in support of its large position
report. Such a request could include the detail on the five components
of a net trading position. Examples of other information that may be
requested include the terms of repurchase agreements involving the
security, such as rate and maturity, as well as transaction volume for
the reported security.
4. Report Signatories and Certifications
In the proposed rules, paragraph 420.3(c)(5) provided a listing of
the administrative information that must be included in the large
position report, the individuals authorized to sign the report, and the
required certification language attesting to the accuracy and
completeness of the report and to compliance by the reporting entity
with the large position rules under this part. A number of commenters
recommended that the list of those individuals authorized to sign the
large position reports be expanded to include other officials and
further that authority to sign be permitted to be delegated to other
individuals. Additionally, many commenters requested that the
certification language be changed to permit the designated filing
entity to rely on certifications or other reasonable bases of evidence
received from the aggregating entities regarding the accuracy and
completeness of the large position information provided by the
aggregating entities.
In response to these comments, the Department is liberalizing and
providing greater flexibility for the signatory and certification
requirements. Paragraph 420.3(c)(5) as it appeared in the proposed
rules is being separated into two paragraphs. New paragraph 420.3(c)(5)
lists the specific administrative information that must be provided in
the large position report without any substantive change from the
proposal.
New paragraph 420.3(c)(6) lists the individuals authorized to sign
the large position reports and provides the specific certification
language that must be included in each report. This
[[Page 48346]]
provision is being revised in the final rules by adding the chief
compliance officer and chief legal officer to the list of officials
authorized to sign the large position reports. In broadening the list
of authorizing officials, the Department believes affected firms will
have greater flexibility to determine the appropriate signatory for a
particular report.
New paragraph 420.3(c)(6) also contains a provision requiring two
certification statements. The first certification statement requires
the person signing the large position report to certify that the
information contained in the report with respect to the designated
filing entity is accurate and complete. This is consistent with the
certification in the proposed rules. However, the certification
language regarding (i) the accuracy and completeness of the large
position information related to the other aggregating entities and (ii)
compliance by the reporting entity, including all aggregating entities,
with the large position recordkeeping and reporting rules has been
modified to permit such certifications based on lesser standards of
assurance. The final rule language will enable the signatories to make
the required certifications based on a standard of reasonable inquiry
and best knowledge and belief. Such an approach permits the authorized
official to rely on certifications, schedules or other reasonable bases
of evidence that the aggregating entities provide to the designated
filing entity pertaining to their holdings of large positions and
compliance with the rules.
This certification approach adopted in the final rules is similar
to that used by the SEC regarding reports filed under Sections 13(d)
and 13(g) of the Securities Exchange Act of 1934.17
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\17\ 17 CFR 240.13d-1; 240.13d-101; 240.13d-102, item 10; 15
U.S.C. 78m(d), 78m(g).
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5. Reporting Time Frame
Twelve of the thirteen comment letters objected to the one and one-
half business day reporting time frame in the proposed rules and
recommended longer time frames ranging from three to ten business days.
In addition, two commenters recommended a phased reporting approach
with staggered deadlines for different types of positions.
The Department is extending the time frame for filing the large
position reports from one and one-half to three and one-half business
days as prescribed in new paragraph 420.3(c)(7). Accordingly, reports
must be received by 12:00 noon Eastern time at the FRBNY, Market
Reports Division, on the fourth business day after the issuance of the
Treasury press release requesting large position information.
The Department is sympathetic to the concerns expressed by the
commenters regarding the time and effort that will be needed to
compile, aggregate and file the large position reports, particularly
where reporting entities have a large number of aggregating entities,
including foreign affiliates. To be weighed against these concerns is
the need that the report be filed relatively quickly in order to
accomplish its purpose. However, we believe that the significant
changes that have been made in the final rules--revising the definition
of gross financing position to exclude securities received as
collateral for commercial loans; expanding the voluntary exclusion for
the gross financing position to cover securities received on any
component of the position; eliminating the requirement to report as a
memorandum entry the amount of the voluntary exclusion; eliminating the
need to report separately each of the five components of the net
trading position; and expanding the flexibility regarding the signatory
and certification requirements--will reduce the burdens associated with
meeting the three and one-half business day reporting requirement.
The Department also wants to clarify a misunderstanding on the part
of some commenters that the large position rules impose an on-going
aggregation requirement. Neither the proposed rules nor these final
rules impose a daily aggregation requirement for large position
information. The Department adopted the on-demand method of reporting
specifically to avoid requiring entities to redesign or develop systems
that would summarize, compile and aggregate large position information
on a daily basis. While all aggregating entities subject to the rules
must make records of their transactions on a daily basis, only the
designated filing entities are required to have a process to aggregate
the large position information on behalf of the reporting entity, and
then only in response to a specific request from the Treasury for large
position reports. The Department is not persuaded that the rules
require firms to develop system interfaces or integrated systems to
compile and aggregate the required large position information.
The Department did not adopt the recommendation for a phased
reporting system. We believe such a system would impose unnecessary
administrative burdens and add unneeded complexity to the reporting
process.
6. Report Media
In response to a request for clarification, paragraph 420.3(d) has
been revised to indicate that facsimile and delivered hard copy reports
are the acceptable media for the large position reports. Reporting
entities should contact the FRBNY staff to work out arrangements if
they wish to submit the reports in a different type of media.
7. Testing of Large Position Reporting System
The Department reiterates its intention to test the accuracy and
reliability of the large position reporting system by requesting large
position reports at least annually, regardless of market conditions for
a particular security. Many commenters expressed concerns that, by the
Treasury not disclosing that a request for large position information
is a test, the market will assume the request is real and may react
negatively, thus creating price anomalies where none existed. While the
Department may announce a test as such, we intend to preserve our
policy prerogative to request large position information without
stating that the request is a test. The Department appreciates and
understands these concerns but believes that the market should be able
to discern, based on the market prices for the security issue selected
for the test, that the request for large position information is only a
test.
D. Section 420.4--Recordkeeping
The recordkeeping rules require large position holders to make and
preserve records related to large position reporting requirements. The
final recordkeeping rules contain minor modifications to the proposed
rules, reflecting the Treasury's review of issues raised in the comment
letters.
The proposed recordkeeping rules required, among other things, that
each designated filing entity, in instances where its reporting entity
controlled a reportable position of at least $2 billion in any Treasury
security during the prior two-year period ending 90 days after
publication of the final rule, submit a letter to the FRBNY
``certifying'' that the designated filing entity had or would have by
the effective date a recordkeeping system capable of making, verifying
the accuracy of, and preserving the requisite records. (A technical
change has been made in these final rules regarding this letter.
Pursuant to section 420.4(a)(2) of the final large position rules, the
letter must now be submitted to the Treasury's Bureau of the Public
Debt, rather than to the FRBNY.)
[[Page 48347]]
Four commenters objected to this requirement. Three commenters
asserted that the provision, which effectively required certain firms
to review positions dating back two years, was unduly time-consuming
and costly since such information could not be readily collected and
aggregated. The third commenter objected on the grounds that certain
entities, particularly banks, are not required to maintain securities-
related records that cover all Treasury securities held as collateral
(e.g., collateral received to secure extensions of credit) and are not
required to maintain records by CUSIP. In addition, three commenters
stated that the designated filing entity should not be expected to
certify the accuracy of the records of other aggregating entities
within the reporting entity.
The Treasury believes that relatively few entities will be subject
to the recordkeeping rules because few entities hold, have held, or
expect to hold reportable positions equal to or greater than $2
billion. Nevertheless, in order to ease the burden on, and costs to,
the firms that will be subject to the rules when they become effective,
the final recordkeeping rules eliminate the requirement that an
affected designated filing entity make a certification in its letter to
the Bureau of the Public Debt. Instead, paragraph 420.4(a)(2) of the
final rules requires the designated filing entity to ``state'' in its
letter that it has in place or will have in place a recordkeeping
system to meet the requirements of the rules. Further, the final rules
clarify the distinction between the designated filing entity's
recordkeeping system requirements and those of the other aggregating
entities in the reporting entity; each letter to the Bureau of the
Public Debt now must also contain a statement that, after reasonable
inquiry and to the best of its knowledge and belief, the designated
filing entity ``represents'' that its aggregating entities also have in
place or will have in place specified recordkeeping systems. In
determining whether to submit a letter and to have the required
recordkeeping systems in place by the effective date, a designated
filing entity can now make such determinations as a result of a
reasonable bases of evidence, or its general knowledge, of the
magnitude of its own positions and those of its aggregating entities
over the two-year time frame. These changes allow firms to avoid the
time and cost of conducting a detailed review of their positions
covering the prior two-year time period.
Further, as described in Section III.C. of this preamble, the final
rules substantially reduce the amount of information required to be
reported pertaining to certain kinds of collateral received to secure
extensions of credit (e.g., collateral for commercial loans). This
change obviates the need to maintain information on some of the
securities collateral about which one commenter expressed concerns.
Section III.C. also discussed the reasons for incorporating into
the final reporting rules an expansion of categories of officials who
are authorized to sign and certify the reports. Using the same
rationale, the final recordkeeping rules in paragraph 420.4(a)(3)
provide that the same expanded list of officials of the designated
filing entity are authorized to sign the letter to the Bureau of the
Public Debt.
The final recordkeeping rules include two additional changes from
the proposed rules. In the event that a designated filing entity
obtains any certifications or schedules from its aggregating entities
pertaining to their holdings of a reportable position, paragraphs
420.4(b)(2) and 420.4(c)(2)(ii) require the designated filing entity to
maintain copies of such certifications or schedules.
The Treasury emphasizes that, although the final recordkeeping
rules impose a modest amount of new requirements, particularly with
regard to entities that are not currently subject to federal securities
recordkeeping rules, the new requirements are not expected to
necessitate significant automation or administrative expenses for the
affected firms. As discussed in the preamble to the proposed rules,
Treasury places a great deal of importance on minimizing the compliance
burden on all affected entities, including unregulated ones. As a
result, Treasury intentionally avoided imposing the vast majority of
the requirements contained in SEC Rule 17a-3 18 on the unregulated
entities. Instead, Treasury selected the most basic record (similar to
the blotter requirement of SEC Rule 17a-3) that would be crucial to
documenting and preparing large position reports without imposing a
burden on the few unregulated firms that are likely to be subject to
the recordkeeping requirements. It is our understanding that such
investors already maintain records capturing most or all of the
information required by the recordkeeping rules.
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\18\ 17 CFR 240.17a-3.
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E. Section 420.5--Effective Date
Section 420.5 sets out the effective date for both the
recordkeeping and reporting provisions of the large position rules. The
rules provide for a delayed effective date approximately six months
after the date of this publication. This period of time is provided to
give affected entities sufficient time to make the necessary
preparations for compliance. Only paragraph 420.4(a) is not subject to
this date but instead contains its own specific dates for compliance.
F. Appendix B to Part 420--Sample Large Position Report
The sample large position report in Appendix B has been shortened
to conform to the changes in paragraph 420.3(c) of the final reporting
rules. Refer to Section III.C. of this preamble for an explanation of
the changes.
IV. Special Analysis
The rules do not meet the criteria for a ``significant regulatory
action'' pursuant to Executive Order 12866.
In the preamble to the proposed rules, pursuant to the Regulatory
Flexibility Act (5 U.S.C. 601 et seq.), the Department certified that
these amendments, if adopted, would not have a significant economic
impact on a substantial number of small entities. Accordingly, a
regulatory flexibility analysis was not prepared. The proposed and
final rules establish a minimum large position threshold of $2 billion
which assures market participants that the Treasury would not request
large position reports below that minimum amount. The Department
continues to believe that there are no small entities that will control
positions of $2 billion or greater in any Treasury security. Based on
this fact and its review of the final rules being adopted herein, and
since no comments were received related to this particular issue, the
Department has concluded there is no reason to alter the previous
certification.
The collections of information contained in the final regulations
have been reviewed and approved by the Office of Management and Budget
under section 3507(d) of the Paperwork Reduction Act of 1995 (44 U.S.C.
Chapter 35) under Control Number 1535-0089. Under the Act, an agency
may not conduct or sponsor, and a person is not required to respond to,
a collection of information unless it displays a valid OMB control
number.
The information is being collected by the Department to enable the
Treasury and other regulators to understand better the possible reasons
for any apparent significant price distortions and the possible causes
of market shortages in certain Treasury securities. The collection of
information will help
[[Page 48348]]
ensure that the Treasury securities market remains liquid and
efficient, and is not viewed as subject to manipulation. The final
rules apply to nearly all market participants controlling large
positions as defined in the rules. Per paragraph 420.3(c), it is a
mandatory requirement that reporting entities with reportable positions
that equal or exceed the specified threshold in a Treasury notice
respond through their designated filing entities by filing a report in
the required format and within the specified reporting time frame. The
GSAA provides that the Department shall not be compelled to disclose
publicly any information required to be kept or reported for large
position reporting. Such information is exempt from disclosure under
FOIA.\19\
---------------------------------------------------------------------------
\19\ See supra note 9.
---------------------------------------------------------------------------
Estimated total annual reporting and recordkeeping burden: 4,940
hours.
Estimated annual number of recordkeepers: 100.
Estimated annual number of respondents: 10.
Estimated annual frequency of response: On occasion.
Comments on the accuracy of the estimate for this collection of
information or suggestions to reduce the burden should be sent to the
Office of Information and Regulatory Affairs of the Office of
Management and Budget, Attention: Desk Officer for Department of the
Treasury, Washington, D.C., 20503; with copies to the Government
Securities Regulations Staff, Bureau of the Public Debt, Room 515, 999
E Street, NW., Washington, D.C. 20239-0001.
List of Subjects
17 CFR Part 400
Administrative practice and procedure, Banks, banking, Brokers,
Government securities, Reporting and recordkeeping requirements.
17 CFR Part 420
Foreign investments in U.S., Government securities, Investments,
Reporting and recordkeeping requirements.
For the reasons set out in the preamble, 17 CFR Chapter IV,
subchapter A is amended as follows:
PART 400--RULES OF GENERAL APPLICATION
1. The authority citation for part 400 is revised to read as
follows:
Authority: 15 U.S.C. 78o-5.
2. In Sec. 400.1, paragraph (e) is added as follows:
Sec. 400.1 Scope of regulations.
* * * * *
(e) Section 104 of the Government Securities Act Amendments of 1993
(Pub. L. 103-202, 107 Stat. 2344) amended Section 15C of the Act (15
U.S.C. 78o-5) by adding a new subsection (f), authorizing the Secretary
of the Treasury to adopt rules to require specified persons holding,
maintaining or controlling a large position in to-be-issued or
recently-issued Treasury securities to report such a position and make
and keep records related to such a position. Part 420 of this
subchapter contains the rules governing large position reporting.
3. Part 420 is added to read as follows:
PART 420--LARGE POSITION REPORTING
Sec.
420.1 Applicability.
420.2 Definitions.
420.3 Reporting.
420.4 Recordkeeping.
420.5 Effective Date.
Appendix A to Part 420--Separate Reporting Entity.
Appendix B to Part 420--Sample Large Position Report.
Authority: 15 U.S.C. 78o-5(f).
Sec. 420.1 Applicability.
(a) This part, including the Appendices, is applicable to all
persons that participate in the government securities market,
including, but not limited to: government securities brokers and
dealers, depository institutions that exercise investment discretion,
registered investment companies, registered investment advisers,
pension funds, hedge funds and insurance companies that may control a
reportable position in a recently-issued marketable Treasury bill, note
or bond as those terms are defined in Sec. 420.2.
(b) Notwithstanding paragraph (a) of this section, foreign central
banks, foreign governments and international monetary authorities are
exempt from this part. This exemption is not applicable to a broker,
dealer, financial institution or other entity that engages primarily in
commercial transactions and that may be owned in whole or in part by a
foreign government.
(c) Notwithstanding paragraph (a) of this section, Federal Reserve
Banks are exempt from this part for the portion of any reportable
position they control for their own account.
Sec. 420.2 Definitions.
For the purposes of this part:
(a) ``Aggregating entity'' means a single entity (e.g., a parent
company, affiliate, or organizational component) that is combined with
other entities, as specified in paragraph (i) of this section, to form
a reporting entity. In those cases where an entity has no affiliates,
the aggregating entity is the same as the reporting entity.
(b) ``Control'' means having the authority to exercise investment
discretion over the purchase, sale, retention or financing of specific
Treasury securities. Only one entity should be considered to have
investment discretion over a particular position.
(c) ``Gross financing position'' is the sum of the gross par
amounts of a security issue received from financing transactions,
including reverse repurchase transactions and bonds borrowed, and as
collateral for financial derivatives and other securities transactions
(e.g., margin loans). In calculating the gross financing position, a
reporting entity may not net its positions against repurchase
transactions, securities loaned, or securities pledged as collateral
for financial derivatives and other securities transactions. However, a
reporting entity may elect to reduce its gross financing position by
the par amount of the security received in transactions: in which the
counterparty retains the right to substitute securities; that are
subject to third party custodial relationships; or that are hold-in-
custody agreements.
(d) ``Large position threshold'' means, with respect to a
reportable position, the dollar par amount such position must equal or
exceed in order for a reporting entity to be required to submit a large
position report. The large position threshold will be announced by the
Department and may vary with each notice of request to report large
position information and with each specified Treasury security.
However, under no circumstances will a large position threshold be less
than $2 billion.
(e) ``Net fails position'' is the net par amount of ``fails to
receive'' less ``fails to deliver'' in the same security. The net fails
position, as reported, may not be less than zero.
(f) ``Net trading position'' is the net sum of the following
respective positions in the specific security issue:
(1) Cash/immediate net settled positions;
(2) Net when-issued positions;
(3) Net forward positions, including next-day settling;
(4) Net futures contract positions that require delivery of the
specific security; and
(5) Net holdings of STRIPS principal components of the security.
[[Page 48349]]
(g) ``Recently-issued'' means:
(1) With respect to Treasury securities that are issued quarterly
or more frequently, the three most recent issues of the security (e.g.,
in early April, the January, February, and March 2-year notes).
(2) With respect to Treasury securities that are issued less
frequently than quarterly, the two most recent issues of the security.
(3) With respect to a reopened security, the entire issue of a
reopened security (older and newer portions) based on the date the new
portion of the reopened security is issued by the Department (or for
when-issued securities, the scheduled issue date).
(4) For all Treasury securities, a security announced to be issued
or auctioned but unissued (when-issued), starting from the date of the
issuance announcement. The most recent issue of the security is the one
most recently announced.
(5) Treasury security issues other than those specified in
paragraphs (g)(1) and (2) of this section, provided that such large
position information is necessary and appropriate for monitoring the
impact of concentrations of positions in Treasury securities.
(h) ``Reportable position'' is the sum of the net trading
positions, gross financing positions and net fails positions in a
specified issue of Treasury securities collectively controlled by a
reporting entity.
(i) ``Reporting entity'' means any corporation, partnership, person
or other entity and its affiliates, as further provided herein. For the
purposes of this definition, an affiliate is any: entity that is more
than 50% owned, directly or indirectly, by the aggregating entity or by
any other affiliate of the aggregating entity; person or entity that
owns, directly or indirectly, more than 50% of the aggregating entity;
person or entity that owns, directly or indirectly, more than 50% of
any other affiliate of the aggregating entity; or entity, a majority of
whose board of directors or a majority of whose general partners are
directors or officers of the aggregating entity or any affiliate of the
aggregating entity.
(1) Subject to the conditions prescribed in Appendix A, one or more
aggregating entities, either separately or together with one or more
other aggregating entities, may be recognized as a separate reporting
entity.
(2) Notwithstanding this definition, any persons or entities that
intentionally act together with respect to the investing in, retention
of, or financing of, Treasury securities are considered, collectively,
to be one reporting entity.
Sec. 420.3 Reporting.
(a) A reporting entity is subject to the reporting requirements of
this section only when its reportable position equals or exceeds the
large position threshold specified by the Department for a specific
Treasury security issue. The Department shall provide notice of such
threshold by issuance of a press release and subsequent publication of
the notice in the Federal Register. Such notice will identify the
Treasury security issue to be reported (including, where applicable,
identification of the related STRIPS principal component); the date or
dates (as of close of business) for which the large position
information must be reported; and the applicable large position
threshold for that issue. It is the responsibility of a reporting
entity to take reasonable actions to be aware of such a notice.
(b) A reporting entity shall select one entity from among its
aggregating entities (i.e., the designated filing entity) as the entity
designated to compile and file a report on behalf of the reporting
entity. The designated filing entity shall be responsible for filing
any large position reports in response to a notice issued by the
Department and for maintaining the additional records prescribed in the
applicable paragraph of Sec. 420.4.
(c)(1) In response to a notice issued under paragraph (a) of this
section requesting large position information, a reporting entity with
a reportable position that equals or exceeds the specified large
position threshold stated in the notice shall compile and report the
amounts of the reporting entity's reportable position in the order
specified, as follows:
(i) net trading position;
(ii) gross financing position;
(iii) net fails position; and
(iv) total reportable position.
(2) The large position report should include the following
additional memorandum item: a total that includes the amounts of
securities delivered through repurchase agreements, securities loaned,
and as collateral for financial derivatives and other securities
transactions. This total should not be reflected in the gross financing
position.
(3) An illustration of a sample report is contained in Appendix B.
The net trading position shall be one net number and reported as the
applicable positive or negative number (or zero). The gross financing
position and net fails position should each be reported as a single
entry. If the amount of the net fails position is zero or less, report
zero. All position amounts should be reported on a trade date basis and
at par in millions of dollars.
(4) All positions must be reported as of the close of business of
the reporting date(s) specified in the notice.
(5) Each submitted large position report must include the following
administrative information in addition to the reportable position: the
name of the reporting entity, the address of the principal place of
business, the name and address of the designated filing entity, the
Treasury security that is being reported, the CUSIP number for the
security being reported, the report date or dates for which information
is being reported, the date the report was submitted, the name and
telephone number of the person to contact regarding information
reported, and the name and position of the authorized individual
submitting this report.
(6) The large position report must be signed by one of the
following: the chief compliance officer; chief legal officer; chief
financial officer; chief operating officer; chief executive officer; or
managing partner or equivalent. The designated filing entity must also
include in the report, immediately preceding the signature, a statement
of certification as follows:
By signing below, I certify that the information contained in
this report with regard to the designated filing entity is accurate
and complete. Further, after reasonable inquiry and to the best of
my knowledge and belief, I certify: (i) That the information
contained in this report with regard to any other aggregating
entities is accurate and complete; and (ii) that the reporting
entity, including all aggregating entities, is in compliance with
the requirements of 17 CFR Part 420.
(7) The report must be filed before noon Eastern time on the fourth
business day following issuance of the press release.
(d) A report to be filed pursuant to paragraph (c) of this section
will be considered filed when received by the Federal Reserve Bank of
New York, Market Reports Division. The report may be filed with the
Federal Reserve Bank of New York by facsimile or delivered hard copy.
The Federal Reserve Bank of New York may in its discretion also
authorize additional means of reporting.
(e) A reporting entity that has filed a report pursuant to
paragraph (c) of this section shall, at the request of the Department
or the Federal Reserve Bank of New York, timely provide any
supplemental information pertaining to such report.
(Approved by the Office of Management and Budget under control
number 1535-0089)
[[Page 48350]]
Sec. 420.4 Recordkeeping.
(a)(1) Notwithstanding the provisions of paragraphs (b) and (c) of
this section, an aggregating entity must make and maintain records
pursuant to this part as of its effective date, but only if the
aggregating entity has controlled a portion of its reporting entity's
reportable position in any Treasury security when such reportable
position of the reporting entity has equaled or exceeded the minimum
large position threshold specified in Sec. 420.2(d) (i.e., $2 billion)
during the prior two-year period ending December 11, 1996. Subsequent
to the effective date, an aggregating entity that controls a portion of
its reporting entity's reportable position in a recently-issued
Treasury security, when such reportable position of the reporting
entity equals or exceeds the minimum large position threshold, shall be
responsible for making and maintaining the records prescribed in this
section.
(2) In the case of a reporting entity whose reportable position in
any Treasury security has equaled or exceeded the minimum large
position threshold during the prior two-year period ending December 11,
1996, each such reporting entity's designated filing entity shall
submit a letter to the Government Securities Regulations Staff, Bureau
of the Public Debt, 999 E Street, N.W., Room 515, Washington, DC 20239,
stating that the designated filing entity has in place, or will have in
place by the effective date, a recordkeeping system (including policies
and procedures) capable of making, verifying the accuracy of, and
preserving the records required pursuant to this section. The letter
shall further state that, after reasonable inquiry and to the best of
its knowledge and belief, the designated filing entity represents that
all other aggregating entities have in place, or will have in place by
the effective date, a system (including policies and procedures)
capable of making, verifying the accuracy of, and preserving the
records required pursuant to this section.
(3) The letter specified in paragraph (a)(2) of this section must
be signed by one of the following: the chief compliance officer; chief
legal officer; chief financial officer; chief operating officer; chief
executive officer; or managing partner or equivalent. The letter must
be received by the Bureau of the Public Debt no later than January 21,
1997.
(b) Records to be made and preserved by entities that are subject
to the recordkeeping provisions of the Commission, the Department, or
the appropriate regulatory agencies for financial institutions. As an
aggregating entity, compliance by a registered broker or dealer,
registered government securities broker or dealer, noticed financial
institution, depository institution that exercises investment
discretion, registered investment adviser, or registered investment
company with the applicable recordkeeping provisions of the Commission,
the Department, or the appropriate regulatory agencies for financial
institutions shall constitute compliance with this section, provided
that if such entity is also the designated filing entity it:
(1) Makes and keeps copies of all large position reports filed
pursuant to this part;
(2) Makes and keeps supporting documents or schedules used to
compute data for the large position reports filed pursuant to this
part, including any certifications or schedules it receives from
aggregating entities pertaining to their holdings of a reportable
position;
(3) Makes and keeps a chart showing the organizational entities
that are aggregated (if applicable) in determining a reportable
position; and
(4) With respect to recordkeeping preservation requirements that
contain more than one retention period, preserves records required by
paragraphs (b)(1)-(3) of this section for the longest record retention
period of applicable recordkeeping provisions.
(c) Records to be made and kept by other entities. (1) An
aggregating entity that is not subject to the provisions of paragraph
(b) of this section shall make and preserve a journal, blotter, or
other record of original entry containing an itemized record of all
transactions that fall within the definition of a reportable position,
including information showing the account for which such transactions
were effected and the following information pertaining to the
identification of each instrument: the type of security, the par
amount, the CUSIP number, the trade date, the maturity date, the type
of transaction (e.g., a reverse repurchase agreement), and the name or
other designation of the person from whom sold or purchased.
(2) If such aggregating entity is also the designated filing
entity, then in addition, it shall make and preserve the following
records:
(i) Copies of all large position reports filed pursuant to this
part;
(ii) Supporting documents or schedules used to compute data for the
large position reports filed pursuant to this part, including any
certifications or schedules it receives from aggregating entities
pertaining to their holdings of a reportable position; and
(iii) A chart showing the organizational entities that are
aggregated (if applicable) in determining a reportable position.
(3) With respect to the records required by paragraphs (c) (1) and
(2) of this section, each such aggregating entity shall preserve such
records for a period of not less than six years, the first two years in
an easily accessible place. If an aggregating entity maintains its
records at a location other than its principal place of business, the
aggregating entity must maintain an index that states the location of
the records, and such index must be easily accessible at all times.
(Approved by the Office of Management and Budget under control
number 1535-0089)
Sec. 420.5 Effective Date.
The provisions of this part, except for Sec. 420.4(a), shall be
first effective on March 31, 1997.
Appendix A to Part 420--Separate Reporting Entity
Subject to the following conditions, one or more aggregating
entity(ies) (e.g., parent, subsidiary, or organizational component) in
a reporting entity, either separately or together with one or more
other aggregating entity(ies), may be recognized as a separate
reporting entity. All of the following conditions must be met for such
entity(ies) to qualify for recognition as a separate reporting entity:
(1) Such entity(ies) must be prohibited by law or regulation from
exchanging, or must have established written internal procedures (i.e.,
Chinese walls) designed to prevent the exchange of information related
to transactions in Treasury securities with any other aggregating
entity;
(2) Such entity(ies) must not be created for the purpose of
circumventing these large position reporting rules;
(3) Decisions related to the purchase, sale or retention of
Treasury securities must be made by employees of such entity(ies).
Employees of such entity(ies) who make decisions to purchase or dispose
of Treasury securities must not perform the same function for other
aggregating entities; and
(4) The records of such entity(ies) related to the ownership,
financing, purchase and sale of Treasury securities must be maintained
by such entity(ies). Those records must be identifiable--separate and
apart from similar records for other aggregating entities.
[[Page 48351]]
To obtain recognition as a separate reporting entity, each
aggregating entity or group of aggregating entities must request such
recognition from the Department pursuant to the procedures outlined in
paragraph 400.2(c) of this title. Such request must provide a
description of the entity or group and its position within the
reporting entity, and provide the following certification:
``[Name of the entity(ies)] hereby certifies that to the best of
its knowledge and belief it meets the conditions for a separate
reporting entity as described in Appendix A to 17 CFR Part 420. The
above named entity also certifies that it has established written
policies or procedures, including ongoing compliance monitoring
processes, that are designed to prevent the entity or group of entities
from:
``(1) Exchanging any of the following information with any other
aggregating entity (a) positions that it holds or plans to trade in a
Treasury security; (b) investment strategies that it plans to follow
regarding Treasury securities; and (c) financing strategies that it
plans to follow regarding Treasury securities, or
``(2) In any way intentionally acting together with any other
aggregating entity with respect to the purchase, sale, retention or
financing of Treasury securities.
``The above-named entity agrees that it will promptly notify the
Department in writing when any of the information provided to obtain
separate reporting entity status changes or when this certification is
no longer valid.''
Any entity, including any organizational component thereof, that
previously has received recognition as a separate bidder in Treasury
auctions from the Department pursuant to 31 CFR Part 356 is also
recognized as a separate reporting entity without the need to request
such status, provided such entity continues to be in compliance with
the conditions set forth in Appendix A of 31 CFR Part 356.
Appendix B to Part 420--Sample Large Position Report
Formula for Determining a Reportable Position
[$ Amounts in millions at par value as of trade date]
Security Being Reported........................ ____________
Date For Which Information is Being Reported... ____________
1. Net Trading Position (Total of cash/
immediate net settled positions; net when-
issued positions; net forward positions,
including next day settling; net futures
contracts that require delivery of the
specific security; and net holdings of STRIPS
principal components of the security.)........ ____________
2. Gross Financing Position (Total of
securities received through reverse repos
(including forward settling reverse repos),
bonds borrowed, financial derivative
transactions and as collateral for other
securities transactions which total may be
reduced by the optional exclusion described in
Sec. 420.2(c).).............................. + $ ____________
3. Net Fails Position (Fails to receive less
fails to deliver. If equal to or less than
zero, report 0.).............................. + $ ____________
4. Total Reportable Position................... = $ ____________
Memorandum: Report one total which includes the gross par amounts of
securities delivered through repurchase agreements, securities loaned,
and as collateral for financial derivatives and other securities
transactions. Not to be included in item #2 (Gross Financing Position)
as reported above.
$ ____________
Administrative Information To Be Provided in the Report
Name of Reporting Entity:
Address of Principal Place of Business:
Name and Address of the Designated Filing Entity:
Treasury Security Reported on:
CUSIP Number:
Date or Dates for Which Information Is Being Reported:
Date Report Submitted:
Name and Telephone Number of Person to Contact Regarding Information
Reported:
Name and Position of Authorized Individual Submitting this Report (Chief
Compliance Officer; Chief Legal Officer; Chief Financial Officer; Chief
Operating Officer; Chief Executive Officer; or Managing Partner or
Equivalent of the Designated Filing Entity Authorized to Sign Such
Report on Behalf of the Entity):
Statement of Certification: ``By signing below, I certify that the
information contained in this report with regard to the designated
filing entity is accurate and complete. Further, after reasonable
inquiry and to the best of my knowledge and belief, I certify: (i) that
the information contained in this report with regard to any other
aggregating entities is accurate and complete; and (ii) that the
reporting entity, including all aggregating entities, is in compliance
with the requirements of 17 CFR Part 420.''
Signature of Authorized Person Named Above:
Dated: August 14, 1996.
Darcy Bradbury,
Assistant Secretary (Financial Markets).
[FR Doc. 96-23331 Filed 9-11-96; 8:45 am]
BILLING CODE 4810-39-P