[Federal Register Volume 61, Number 189 (Friday, September 27, 1996)]
[Proposed Rules]
[Pages 50924-50937]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-24860]


      

[[Page 50923]]


_______________________________________________________________________

Part IV





Department of the Treasury





_______________________________________________________________________



Fiscal Service



_______________________________________________________________________



31 CFR Part 356



Sale and Issue of Marketable Book-Entry Treasury Bills, Notes, and 
Bonds (Department of the Treasury Circular, Public Debt Series No. 1-
93); Proposed Rule

  Federal Register / Vol. 61, No. 189 / Friday, September 27, 1996 / 
Proposed Rules  

[[Page 50924]]



DEPARTMENT OF THE TREASURY

Fiscal Service

31 CFR Part 356


Sale and Issue of Marketable Book-Entry Treasury Bills, Notes, 
and Bonds (Department of the Treasury Circular, Public Debt Series No. 
1-93)

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

ACTION: Proposed rule.

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SUMMARY: The Department of the Treasury (``Department'' or 
``Treasury'') is proposing for comment an amendment to 31 CFR Part 356 
(Uniform Offering Circular for the Sale and Issue of Marketable Book-
Entry Treasury Bills, Notes, and Bonds). This proposed amendment makes 
changes necessary to accommodate the public offering of new Treasury 
inflation-protection securities by the Department. In addition, the 
proposed amendment makes certain technical clarifications and 
conforming changes.

DATES: Comments must be received on or before October 28, 1996.

ADDRESSES: This proposed rule has also been made available for 
downloading from the Bureau of the Public Debt home page at the 
following address: http://www.ustreas.gov/treasury/bureaus/pubdebt/
pubdebt.html. Written comments should be sent to: Government Securities 
Regulations Staff, Bureau of the Public Debt, 999 E Street N.W., Room 
515, Washington, D.C. 20239-0001. Comments may also be sent through the 
Internet to the Government Securities Regulations Staff at 
[email protected]. When sending comments by the Internet, please 
use an ASCII file format and provide your full name and mailing 
address. Comments received will be available for public inspection and 
downloading on the Internet and for public inspection and copying at 
the Treasury Department Library, Room 5030, Main Treasury Building, 
1500 Pennsylvania Avenue, N.W., Washington, D.C. 20220.

FOR FURTHER INFORMATION CONTACT: Ken Papaj (Director), Lee Grandy, 
Chuck Andreatta or Kurt Eidemiller (Government Securities Specialists), 
Bureau of the Public Debt, Government Securities Regulations Staff, 
(202) 219-3632.

SUPPLEMENTARY INFORMATION:

I. Background

    31 CFR Part 356, also referred to as the uniform offering circular, 
sets out the terms and conditions for the sale and issuance by the 
Department of the Treasury to the public of marketable Treasury bills, 
notes, and bonds. The uniform offering circular, in conjunction with 
offering announcements, represents a comprehensive statement of those 
terms and conditions.1
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    \1\ The uniform offering circular was published as a final rule 
on January 5, 1993 (58 FR 412). Amendments to the circular were 
published on June 3, 1994 (59 FR 28773), March 15, 1995 (60 FR 
13906), July 16, 1996 (61 FR 37007), and August 23, 1996 (61 FR 
43626).
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    The Department has decided to offer a new type of security, 
referred to as a Treasury inflation-protection security,2 whose 
principal value will be adjusted for inflation as measured by the 
United States Government. The Department believes the issuance of these 
new inflation-protection securities will reduce interest costs to the 
Treasury over the long term and will broaden the types of debt 
instruments available to investors in U.S. financial markets.
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    \2\ This Part is being revised to accommodate offerings of both 
inflation-protection notes and inflation-protection bonds in order 
to give the Department the flexibility to issue both types of 
inflation-protection securities in the future. However, the 
Department initially plans to offer only one maturity for inflation-
protection securities.
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A. Summary

    As explained in more detail below, after considering the comments 
provided, Treasury has made the following decisions concerning its 
offering of inflation-protection securities with the goal of achieving 
the broadest market appeal. The inflation-protection securities will be 
structured, with some modifications, based on the model of the Real 
Return Bonds currently issued by the Government of Canada. The 
principal of the security will be adjusted for changes in the level of 
inflation. Semiannual interest payments will be made based on a 
constant rate of interest determined at auction. The index for 
measuring the inflation rate for the inflation-protection securities 
will be the non-seasonally adjusted U.S. City Average All Items 
Consumer Price Index for All Urban Consumers published monthly by the 
Bureau of Labor Statistics of the U.S. Department of Labor.
    Further, the Department has decided to begin auctioning 10-year 
inflation-protection notes in January 1997 and quarterly thereafter. 
Specific terms and conditions of each issue will be announced prior to 
each auction. Additional maturities, such as 30-year bonds or 2 to 5-
year notes, are expected to be auctioned later in 1997.
    The principal value of the securities will be adjusted semiannually 
for inflation by multiplying the stated value at issuance, or par 
amount, by an index ratio. The index ratio is the reference CPI 
applicable to a particular valuation day divided by the reference CPI 
applicable to the original issue date. The inflation adjustment will 
not be payable until maturity, when the securities will be redeemed at 
their inflation-adjusted principal amount. The securities will be 
issued with a stated rate of interest that remains constant until 
maturity. Interest payments for a particular security will be 
determined by multiplying the inflation-adjusted principal by one half 
of the stated rate of interest on each semiannual interest payment 
date.
    Inflation-protection notes will be issued with maturities of at 
least one year but no more than ten years. Inflation-protection bonds 
will be issued with maturities of more than ten years. The inflation-
protection securities will be sold at discount, par, or premium and 
will pay interest semiannually. The auctions for inflation-protection 
securities will be conducted as single-price auctions in which 
competitive bidders will bid in terms of a desired real yield (yield 
prior to inflation adjustment), expressed as a percentage with three 
decimals, e.g., 3.630%. The interest rate established as a result of 
the auction will be set at one-eighth of one percent increments that 
produce the price closest to, but not above, par when evaluated at the 
highest real yield at which bids were accepted. The offering 
announcement issued by the Department for each new inflation-protection 
security offering will contain the specific details for that offering.
    The inflation-protection securities will be eligible for STRIPS 
(Separate Trading of Registered Interest and Principal of Securities) 
immediately upon their issuance by the Treasury. The securities, and 
their related stripped components, will also be eligible to serve as 
collateral for Treasury Tax and Loan, Circular 176, and Circular 154 
accounts. Anyone interested in the use of inflation-protection 
securities, and their related stripped components, for such collateral 
purposes should refer to the relevant Financial Management Service 
circulars for more information.

B. Participation in Rulemaking Process/Solicitation of Comments

    The Department believes that extensive discussion about, and 
participant involvement in, the design of the inflation-protection 
security is critical and will result in a new investment product that 
will have wider acceptance and broader market appeal.

[[Page 50925]]

In developing the structure and design features of the inflation-
protection security, the Department used a wide variety of approaches 
to obtain the views of potential investors and market participants. It 
issued an Advance Notice of Proposed Rulemaking (ANPR) on May 20, 
1996.3 The ANPR stated the Department's intention to issue a new 
type of marketable book-entry security with a nominal return linked to 
the inflation rate, addressed several approaches and issues to be 
considered in developing the features of the security and the terms and 
conditions for its sale to the public, and solicited comments and 
suggestions. Specifically, the Treasury sought comments concerning the 
choice of inflation index, structure of the security, auction 
technique, offering sizes, and maturities. Comments were also solicited 
on any other issues that would be relevant to the issuance of a 
Treasury marketable inflation-protection security.
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    \3\ 61 FR 25164 (May 20, 1996).
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    The original 30-day public comment period on the ANPR was 
subsequently extended through July 3, 1996,4 to allow for the 
submission of additional views and suggestions. On July 24, 1996 the 
Department held a public symposium, announced through an additional 
ANPR,5 to discuss the advantages and disadvantages of certain 
proposed security structures under consideration. In addition to 
announcing this symposium to discuss the proposed features, the second 
ANPR posed additional specific questions regarding the proposed 
features and requested written comments in response.
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    \4\ 61 FR 31072 (June 19, 1996).
    \5\ 61 FR 38127 (July 23, 1996).
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    Since announcing Treasury's intention to issue inflation-protection 
securities in May 1996, the Department staff has also held more than 30 
meetings with more than 800 investors, dealers, and other interested 
parties in Washington, D.C., New York, Boston, Chicago, San Francisco, 
London, and Tokyo, and by teleconference with Melbourne and Sydney. 
These meetings provided forums for exchanges of ideas and opinions, and 
for interested parties to provide their views on the proposed new 
security. In developing the design and structural terms of the 
inflation-protection security and the proposed rule, Department staff 
has also spoken and consulted with various government officials and 
market participants in Canada, the United Kingdom, and Australia, 
countries that currently issue inflation-indexed securities, to gather 
information on their respective countries' experience with this type of 
security.

II. Consultation and Comments

A. Introduction

    The Department has received 55 comment letters, summarized herein, 
in response to the two ANPRs. The letters and comments were submitted 
by a wide range of individuals, academicians, investment management 
firms, dealers and institutional investors. Specifically, 6 letters 
were received from trade, legal and/or research organizations; 11 
letters from primary government securities dealers; 7 letters from 
finance and economics professors; 20 letters from commercial banking, 
advisory, and institutional and individual investment management firms; 
and 11 letters from individual investors.6 In addition, the 
Department received numerous comments and suggestions from the investor 
meetings.
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    \6\ Several commenters submitted more than one letter, with each 
letter counted separately in arriving at the total count of 55 
letters. All of the comment letters and summaries of the investor 
meetings are available to the public.
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    While spanning a wide spectrum, with a few commenters not 
supporting the issuance of an inflation-indexed security, the 
overwhelming majority of commenters favored and supported the issuance 
of such a marketable security. A few letters suggested that a non-
marketable security, such as a modified U.S. Savings Bond, might be a 
better inflation-protection investment vehicle.
    The comments, while varied, expressed several consistent and 
reoccurring themes. These themes included the need for simplicity in 
structure and ease in understanding, the need for liquidity in the 
issues of inflation-protection securities, and a preference to have the 
new security conform as much as possible to Treasury's currently issued 
securities (e.g., use the same auction technique). Generally, there was 
a desire to avoid the introduction of a security that would differ 
widely from current market patterns and practices.
    The Department has carefully considered all of the comments that 
were received. While the written comments are summarized below, each 
comment letter did not necessarily address all aspects of the proposed 
new security for which comments were solicited. The comments have been 
summarized and organized into the following five basic categories: the 
choice of inflation index, the type of structure, taxation issues, 
auction technique and initial offering amounts, and maturities.

B. Choice of Inflation Index

    Many commenters discussed the advantages and disadvantages of the 
various potential indices that could be used to measure inflation, 
including the indices on which the Department specifically requested 
comments: the Consumer Price Index for All Urban Consumers (CPI-U), the 
core CPI (the CPI-U minus the food and energy components of the CPI-U), 
the Gross Domestic Product (GDP) deflator, and the Employment Cost 
Index (ECI). Comments were also requested on whether a seasonally or 
non-seasonally adjusted series would be preferred. The letters 
indicated a clear consensus that the selected index should be: 
recognized widely, published frequently, accurate, easily obtainable, 
easily understood, and not revised retroactively. While each index had 
some support, the vast majority of those who commented on the index 
selection advocated that the Consumer Price Index (CPI-U) would be the 
most appropriate index. Many of those who recommended using the CPI-U 
noted that it measures the price changes for the market basket of goods 
and services that most investors are concerned about. Additionally, 
they noted that it is most similar to the indices used by other 
countries that currently issue indexed debt, and thus would facilitate 
understanding the terms of the security.

C. Structure

    The ANPRs proposed several structures and design features on which 
an inflation-protection security could be modelled. These models 
included: (1) A Canadian-style structure, which is a modification of 
the United Kingdom's index-linked gilts, in which interest is paid 
semiannually and the principal amount is adjusted for inflation, so 
that the inflation-adjusted principal and interest payments remain the 
same in constant dollars; (2) a zero-coupon structure; (3) a structure 
that would pay out principal and interest in periodic intervals, 
similar to a price level adjusted mortgage; and (4) a current-pay 
structure where all the inflation compensation and real interest is 
paid out semiannually. Aside from the commenters' opinions on the 
choice of index, the discussion of possible structures and security 
design features generated the most discussion and reaction since this 
decision would directly affect such issues as liquidity, when income is 
paid, investor appeal and preference, and cost of issuance to Treasury.
    All of the proposed structures were commented on, with at least one

[[Page 50926]]

commenter supporting each structure. However, the one structure that 
was discussed the most and was supported by the majority of commenters 
was the one modelled on the Real Return Bonds currently issued by the 
Government of Canada.
    After the first ANPR was published, some commenters at the investor 
meetings suggested that a fourth alternative, the current-pay 
structure, be considered. Therefore, a second ANPR was published to 
solicit views on this alternative and to determine which of these 
structures commenters preferred. In response to the second ANPR, the 
majority of commenters still preferred the Canadian structure.
    Many commenters expressed the view that inflation-protection 
securities should be eligible for stripping as soon as possible, 
preferably beginning with the first issue, since stripping would meet 
market demand for different maturities which would effectively provide 
for a full term structure of real interest rates. It was generally 
believed that the Canadian structure would make stripping easier.
    There was strong support for reopenings of these securities with a 
general belief that reopenings would be important for market liquidity 
and thus would lower Treasury's borrowing costs. Several commenters 
favored reopenings to prevent market problems due to shortages in an 
issue. Other commenters believed that the interest paid on the 
security, rather than the principal amount, should be indexed to the 
CPI, essentially providing for a floating-rate security. The majority 
of commenters, however, said they would prefer a Canadian-style 
security over the current-pay structure.

D. Taxation

    The subject of taxation on income earned on the securities was 
addressed by many respondents. Several advocated that only the interest 
actually paid should be taxable in the year received, while the 
inflation adjustment, if accrued rather than paid, should be taxable 
when actually received by the investor. There was much discussion about 
whether or not the taxation of the inflation adjustment might reduce 
demand by non-tax-advantaged investors and that, with the proposed tax 
treatment, primarily tax-advantaged investors would be initial 
purchasers and holders of these securities. Other commenters advocated 
that, regardless of the tax treatment, the tax rules should be easy to 
understand and administer. Others stated that any inflation adjustment 
payments should not be taxed.

E. Auction Technique and Initial Offering Amounts

    Several commenters addressed the proposed auction technique. As 
stated in the first ANPR, Treasury proposed that a single-price auction 
format be adopted with three different bidding options given for 
consideration. The comments overwhelmingly favored an auction technique 
with which the market is familiar. These commenters supported the use 
of the single-price auction format with competitive bids expressed on a 
real yield basis. The majority of the commenters recommended that 
interest rates be set in one-eighth of one percent increments that 
would result in a price at or just below par. Several of these 
commenters believed this would simplify stripping and facilitate 
reopenings of the issue. The auction processes recommended by the 
commenters essentially conform to those techniques currently employed 
by the Department.
    The Department also requested comments on the appropriate size of 
the initial offering amounts of the auctions and stated its intention 
to increase the offering sizes over time. Commenters generally 
supported issues with offering amounts in the $2-$5 billion range, 
increased over time through reopenings.
    In the first ANPR, comments were solicited on whether the Treasury 
should announce, prior to an auction of an inflation-protection 
security, that it retains, and may exercise, the option to award an 
amount greater or less than the announced public offering amount. Those 
commenters who addressed this issue stated that, while they 
acknowledged Treasury's right to award more or less than the announced 
public offering amount, such right should be exercised only under 
extreme circumstances. A general view was that awarding more or less 
than the stated offering amount would be inconsistent with Treasury's 
long-standing policy of regular and predictable debt issuance and would 
contribute to market uncertainty.

F. Maturities

    The subject of which maturities the Department should offer 
resulted in a large number of comments. The ANPR had proposed 
maturities of either 10 or 30 years. Those who attended the investor 
meetings, in general, preferred an intermediate-term security, such as 
a 10-year note, indicating that a 30-year maturity would be too long 
for the probable investors in this type of security. Some of the 
written comments stated that the issuance of an inflation-protection 
security should initially be in the 10-year range, with a 30-year bond 
being included later on a regular basis. Others advocated the reverse 
pattern, with an initial 30-year bond issuance followed by a 10-year 
note. Several of the letters recommending a longer-term maturity stated 
that, through stripping, any investor demand for shorter-term 
inflation-protection securities could be met. Some argued that 10-30 
years would be too long. Some also commented that, with limited 
knowledge of investor preferences prior to implementation of these new 
securities, some experimentation with different maturity sectors would 
be appropriate.
    Several commenters expressed an interest in a shorter-term 
security, such as one with a 2-5 year maturity. Some commenters 
expressed the view that a broad range of maturities covering the short, 
intermediate, and long ends of the maturity spectrum, or a variation 
that would provide for a series of maturities in 5-year intervals, 
should be provided to promote liquidity and meet demand by investors 
with various maturity horizons.
    Some commenters believed that, regardless of the maturities 
selected, inflation-protection securities should be auctioned at the 
same time as Treasury's fixed-principal securities with the same, or 
similar, maturities, believing that this would result in better pricing 
and liquidity. Others took the opposite view and recommended that the 
auctions not be part of the quarterly refundings because of the already 
large amounts of Treasury securities that are auctioned at those times.

G. Other

    Additional comments expressed support for the development of 
futures and other derivative instruments to ensure a deep and liquid 
market; opposition to a minimum payment guarantee in the belief that 
this might put downward pressure on the security's price over time; and 
the need to disclose potential market or interest rate risk to all 
investors, particularly retail investors, who otherwise might not be 
aware that there could be a period of negative real return.

III. Section-by-Section Analysis

    Based largely on the comments received in response to the ANPRs and 
the feedback obtained in the various investor meetings, the Department 
has decided to issue inflation-protection securities similar to the 
Real Return Bonds issued by the Government of Canada. The proposed 
securities also are more similar to inflation-indexed securities that 
have been issued in other

[[Page 50927]]

countries, such as the United Kingdom, than they are to the other 
alternative structures presented in the ANPRs. Under the Canadian 
structure, the principal amount of the security is adjusted for 
inflation so that the adjusted value remains the same in constant 
dollars. The interest rate remains fixed throughout the life of the 
security, and interest payments are based on the security's inflation-
adjusted principal at the time the interest is paid.
    The Department believes that the similarity of the proposed 
structure to inflation-indexed securities issued by other countries is 
a positive feature. Since many investors are already familiar with this 
structure, the liquidity of the security on a global basis may be 
enhanced. In addition, the two structures presented in the ANPRs that 
would have provided greater cash flows (i.e., paying out the inflation 
adjustment of the principal and/or interest at periodic intervals) 
during the period the security was outstanding were not selected 
because they would have been more complicated and would have carried 
more reinvestment risk than the Canadian model securities. The other 
structure presented in the first ANPR, a zero-coupon inflation-indexed 
security, is being accommodated by making the inflation-protection 
securities eligible for stripping in the commercial book-entry system, 
i.e., TRADES (Treasury/Reserve Automated Debt Entry System), 
immediately upon issuance.
    Of the price or wage indices under consideration, the non-
seasonally adjusted CPI-U was selected because it is the best known and 
most widely accepted measure of inflation. This index was also the 
choice of a substantial majority of commenters to the ANPRs.
    Commenters also advocated using the same auction process (e.g., 
bidding procedures) for inflation-protection securities that is 
currently used for other marketable Treasury securities. Accordingly, 
Treasury has decided to use a single-price auction, with bidding on the 
basis of real yield, expressed with three decimals. The interest rate 
will be set at the one-eighth of one percent increment that produces 
the price closest to, but not more than, par when evaluated at the 
highest real yield awarded to competitive bidders.
    As is the case with all marketable Treasury securities, the size 
and specific terms of the initial issue of the inflation-protection 
security will be announced shortly before the first auction. The 
Treasury intends to begin by issuing 10-year inflation-protection notes 
on January 15, 1997, and on a quarterly basis thereafter (i.e., the 
15th of April, July, October and January). Additional maturities are 
expected to be auctioned within a year of the first auction of 10-year 
notes.
    This proposed amendment, when finalized, would make the necessary 
revisions to accommodate the sale and issuance of marketable book-entry 
Treasury inflation-protection securities. This rule would amend 
Secs. 356.2, 356.3, 356.5, 356.10, 356.12, 356.13, 356.17, 356.20, 
356.25, 356.30, 356.31, 356.32, Appendix B, and Exhibit A of the 
uniform offering circular. This rule also would create two new 
appendices--Appendix C and Appendix D.

A. Definitions

    Specifically, the terms ``business day,'' ``Consumer Price Index,'' 
``daily interest decimal,'' ``index,'' ``index ratio,'' ``inflation-
adjusted principal,'' ``real yield'' and ``reference CPI'' have been 
added to the listing of definitions in Sec. 356.2.
    Several other definitions have been slightly modified to 
incorporate minor conforming changes. For instance, the definition of 
``book-entry security'' has been modified by adding a sentence 
referencing the two systems in which marketable Treasury book-entry 
securities may be held--TRADES and TREASURY DIRECT. Also, the 
definition of ``par amount'' has been modified slightly to indicate 
that the term refers to the stated value of a security at original 
issuance (i.e., the date from which interest accrues). The meaning of 
the term, however, essentially remains unchanged. For example, for 
Treasury bills and fixed-principal securities, the par amount still is 
the principal amount to be paid at maturity. For inflation-protection 
securities, par amount does not include an inflation adjustment after 
issuance. Further, par amount refers to the amount at which all 
marketable Treasury securities (including inflation-protection 
securities) will be maintained and transferred in TRADES or TREASURY 
DIRECT.
    The definition of ``settlement amount'' also has been modified to 
indicate that, for inflation-protection securities, such amount 
includes an inflation adjustment, if any. This could happen in the case 
of reopenings or when the date interest begins to accrue is different 
from the actual issue date. For fixed-principal securities, the 
definition of settlement amount is unchanged. Readers should refer to 
Appendix B, Section III, for examples of settlement amount computations 
for inflation-protection securities.7
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    \7\  The examples in Appendix B, Section II, pertaining to price 
computations for fixed-principal securities do not include 
settlement amount calculations. However, settlement amounts in those 
examples can be derived by multiplying the price in terms of a 
percentage of par by the awarded par amount and by adding to that 
amount any accrued interest.
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B. Conforming Changes

    Changes have been made to Sec. 356.3 to reflect more completely the 
operation of TRADES. In this system, marketable Treasury book-entry 
securities are held through a tiered system of ownership, and Treasury 
discharges its payment obligation when payment is credited to a 
person's or entity's account maintained at a Federal Reserve Bank. The 
system is described in Treasury's rules for Treasury securities held in 
TRADES.8 The changes to Sec. 356.3 also clarify Treasury's payment 
obligation with respect to Treasury securities held in the TREASURY 
DIRECT system. This section has also been modified to note that 
inflation-protection securities are maintained and transferred at their 
par amount in both systems. Adjustments for inflation are not included 
in the par amount.
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    \8\  61 FR 43626 (August 23, 1996).
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    In Sec. 356.5, the description of Treasury securities has been 
modified to distinguish between Treasury securities with fixed-
principal amounts and those whose principal amounts will be adjusted 
for inflation. The Department will nonetheless continue to refer to 
securities with a fixed-principal amount as ``Treasury notes'' or 
``Treasury bonds'' in official Treasury publications, such as the 
offering announcement and auction results press release, as well as in 
auction systems. Securities whose principal amounts will be adjusted 
for inflation will be referred to as ``Treasury inflation-protection 
notes'' or ``Treasury inflation-protection bonds.'' New paragraphs 
(b)(2) and (c)(2) provide a brief description of such inflation-
protection securities.
    In paragraph 356.12(a), a change has been made to clarify that, for 
reopenings of all securities, bidding will be in terms of par amount. 
It is noted, however, that in the case of reopenings of inflation-
protection securities, the par amount of awarded bids will be 
multiplied by the applicable index ratio for the additional (reopening) 
issue date to determine the settlement amount. Treasury will provide 
this index ratio in the offering announcement for the reopened 
security. Readers are referred to Appendix B, Section III, Paragraph B 
of the proposed rules for an example that

[[Page 50928]]

illustrates how bids are to be submitted and how the settlement amount 
will be calculated for a reopening of an inflation-protection security.
    A modification has been made to paragraph 356.12(b)(2) under 
``additional restrictions'' to bidding in auctions. This modification 
clarifies that a noncompetitive bid cannot be made by any bidder who 
has held, at any time between the offering announcement and the closing 
time for receipt of competitive tenders, a position in when-issued 
trading or in futures or forward contracts in the security being 
auctioned. This clarifying change is consistent with Treasury's current 
application of this provision of the uniform offering circular.
    In Sec. 356.13, changes have been made to highlight the fact that 
the net long position reporting threshold amount will always be 
provided in the offering announcement for each security. This is 
consistent with Treasury's current practice. The net long position 
reporting threshold will continue to be $2 billion for bills, notes, 
and bonds unless otherwise stated in the offering announcement. For 
example, the Department anticipates that the net long position 
reporting threshold for smaller securities offerings, such as initial 
offerings of inflation-protection securities and certain cash 
management bills, may be lower than $2 billion. As is currently the 
case, the provisions of the offering announcement control whenever any 
provision of the offering announcement is inconsistent with any 
provision of the uniform offering circular. (See 31 CFR Sec. 356.10.)
    Paragraphs 356.17(a) and (b) contain minor conforming 
clarifications to reflect that bidders submitting payment with their 
tender may have to include, in addition to announced accrued interest, 
an inflation-adjustment amount with their payment.
    In Sec. 356.20, paragraph (c)(2) has been expanded to clarify that, 
for inflation-protection securities, the price for securities awarded 
to competitive and noncompetitive bidders reflects the highest real 
yield at which bids were accepted.
    No changes have been made to the current $500 million customer 
confirmation threshold in Sec. 356.24(d). Thus, any customer awarded a 
par amount of $500 million or more of an inflation-protection security 
is required to furnish to the Federal Reserve Bank to which the bid was 
submitted a confirmation of its bid and net long position, if any. As 
with the net long position threshold, if the Department modifies the 
customer confirmation threshold for any particular auction, the revised 
customer confirmation threshold will be stated in the offering 
announcement for that auction, and the offering announcement will 
govern.
    A conforming change has been made to paragraph 356.25(a)(2) to 
state that additional amounts due at settlement may include inflation 
adjustments. Additionally, a new paragraph (c) has been added to 
Sec. 356.25 to provide that the payment amount for awarded securities 
will be the settlement amount, as that term is defined in Sec. 356.2.
    The last sentence in Sec. 356.30(a) has been modified to reflect 
that the term ``business day'' has been added as a defined term to 
Sec. 356.2.
    A new paragraph (b) has been added to Sec. 356.30 to guarantee an 
investor's par amount of inflation-protection securities. If at 
maturity the inflation-adjusted principal is less than the par amount 
of the security, an additional amount will be paid at maturity so that 
the additional amount plus the inflation-adjusted principal equals the 
par amount. However, interest payments will always be based on the 
inflation-adjusted principal.
    New paragraphs (c), (d), (e), and (f) have been added to 
Sec. 356.31 to provide separate descriptions of principal and interest 
components stripped from fixed-principal and inflation-protection 
securities. Paragraphs (d) and (f), respectively, distinguish between 
interest components stripped from fixed-principal securities and 
interest components stripped from inflation-protection securities in 
regard to their ``fungibility.'' Interest components having the same 
maturity date that have been stripped from fixed-principal securities 
are fungible (i.e., have the same CUSIP number) regardless of the 
underlying security from which the interest payments were stripped. 
Interest components stripped from inflation-protection securities, 
however, will not be fungible with interest components stripped from 
other inflation-protection or fixed-principal securities, even if they 
have the same maturity date. Making interest components of inflation-
protection securities fungible is not practical because the amount of a 
particular interest payment for such securities reflects in part the 
reference CPI for the issue date of that security. Different underlying 
inflation-protection securities will have different issue dates with 
different reference CPI numbers. However, Treasury has the ability to 
increase the amount outstanding of these non-fungible stripped 
components through reopenings of the underlying inflation-protection 
securities.
    Section 356.31 also has been revised to distinguish between 
principal components stripped from fixed-principal and inflation-
protection securities, which are maintained and transferred in TRADES 
at their par amount, and interest components stripped from fixed-
principal and inflation-protection securities, which are maintained and 
transferred in TRADES at their original payment value. This value is 
derived by applying the semiannual interest rate to the par amount. For 
inflation-protection securities, the amounts maintained and transferred 
in TRADES are different from the actual value of the principal and 
interest components as adjusted for inflation. For stripped principal 
components of inflation-protection securities, the holder will receive 
the inflation-adjusted principal value or the par amount, whichever is 
greater, at maturity. For stripped interest components of these 
securities, the amount payable to the holder will be derived by 
applying the semiannual interest rate to the inflation-adjusted 
principal of the underlying security.
    Section 356.32 has been reorganized. Paragraph (a) provides a 
general taxation provision applicable to all marketable Treasury 
securities. Paragraph (b) applies only to inflation-protection 
securities. It directs investors to the relevant Internal Revenue 
Service (IRS) regulations that will be published concurrently with the 
final rule amending the uniform offering circular for further 
information about the tax treatment and reporting of inflation-
protection securities. From the publication date of this proposed 
amendment to the uniform offering circular until the date of issuance 
of the final rule, investors are advised to refer to IRS Notice 96-51 
published in the Internal Revenue Bulletin 1996-42 (October 15, 1996) 
for information regarding taxation of inflation-protection securities 
and the stripped components of such securities. Additionally, 
concurrent with the filing of these proposed rules, Treasury is issuing 
a statement providing a more detailed explanation of the federal income 
tax treatment for inflation-protection securities and stripped 
components thereof. Readers interested in receiving a copy of this 
statement should call the Department's Public Affairs automated 
facsimile system at 202-622-2040. After issuance of the final uniform 
offering circular amendment, investors are advised to refer to the 
applicable proposed and temporary regulations issued under 
Secs. 1275(d) and 1286 of the Internal

[[Page 50929]]

Revenue Code. In the preamble to the final amendment to the uniform 
offering circular rules, the Department will reference the Federal 
Register and Code of Federal Regulations citations for the IRS 
regulations, as available.
    Minor revisions have been made to existing paragraphs A through D 
of Appendix B, Section I, by redesignating the paragraphs as numerical 
subparagraphs and inserting the term ``Treasury fixed-principal 
securities'' at the beginning (as paragraph A) to clarify that these 
paragraphs relate specifically to fixed-principal notes and bonds, not 
inflation-protection securities. A new paragraph B has been added to 
Section I of Appendix B that describes and illustrates with an example 
how the principal value of an inflation-protection security will be 
adjusted for inflation, how interest payments will be calculated, and 
how the index ratio for a particular date will be calculated. Unlike 
paragraph A, which includes examples of short and long interest 
payments, paragraph B provides only an example of regular half-year 
interest payments since Treasury does not anticipate short and long 
interest payments for Treasury inflation-protection securities.
    Treasury does not intend to publish the index ratio or any 
reference CPIs since market participants should be able to make the 
computations themselves. However, Treasury requests comments on whether 
or not a monthly publication of the daily index ratios or reference 
CPIs would be useful to market participants. The Treasury will issue a 
press release monthly that will provide the non-seasonally adjusted CPI 
for each of the prior three months. Treasury intends to provide this 
information through media such as the Internet, telephone recordings, 
and TAAPS (Treasury Automated Auction Processing System). The monthly 
CPI numbers are also available from the Bureau of Labor Statistics of 
the U.S. Department of Labor.
    Paragraph B of Section I also explains what Treasury's course of 
action will be if, while an inflation-protection security is 
outstanding, the index is revised, rebased to a different year, not 
reported, or discontinued. The procedures are the same as those 
originally stated in the first ANPR. If a previously reported CPI is 
revised, Treasury will continue to use the previously reported CPI in 
calculating the inflation-adjusted principal and interest payments. If 
the CPI is rebased to a different year, Treasury will continue to use 
the CPI based on the base reference period in effect when the security 
was first issued, as long as that CPI continues to be published. The 
specific CPI-U series for each inflation-protection security will be 
provided in the Treasury offering announcement. If the CPI is 
discontinued or substantially altered while an inflation-protection 
security is outstanding, Treasury will consult with the Bureau of Labor 
Statistics or its successor agency to determine an appropriate 
substitute index and methodology for linking the two series. Treasury 
would then notify the public of the substitute index and methodology. 
For new issues of Treasury inflation-protection securities, if the 
Federal Government commences publication of an index that is more 
accurate or otherwise more appropriate for indexation than the Consumer 
Price Index, Treasury would also notify the public. Moreover, the 
uniform offering circular would be amended, as appropriate, to reflect 
changes in the use of the index.
    The previous paragraph E to Section I of Appendix B has been 
redesignated as paragraph C and expanded to include a description of 
the accrued interest payable calculation for an inflation-protection 
security if accrued interest covers a fractional portion of the first 
full half-year period.
    Minor changes have been made to paragraphs A through G of Appendix 
B, Section II, to reflect their applicability solely to fixed-principal 
securities. A disclaimer has been added near the beginning of Appendix 
B to clarify that any numbers in the examples are provided only for 
illustrative purposes and are not intended to be predictions of 
interest rates for Treasury securities. In addition, a statement 
regarding intermediate rounding used in the examples has been moved 
toward the beginning of Appendix B.
    A new Section III has been included in Appendix B to illustrate the 
calculation of the settlement amount for inflation-protection 
securities with a regular first interest payment period and to 
illustrate the calculation of the settlement amount, including 
predetermined accrued interest and inflation adjustment, of a reopened 
inflation-protection security. Accompanying definitions have also been 
added.
    A new Appendix C containing investment considerations for 
inflation-protection securities has been added because of the unique 
factors facing prospective investors in this new security.
    A new Appendix D has been added to provide a description of the 
Consumer Price Index for All Urban Consumers.
    Finally, a new Section IV has been added to Exhibit A that provides 
an example of an offering announcement press release by the Treasury to 
the public for an inflation-protection security. The press release 
includes accompanying highlights.

IV. Procedural Requirements

    This proposed rule does not meet the criteria for a ``significant 
regulatory action'' pursuant to Executive Order 12866.
    Although this rule is being issued in proposed form to secure the 
benefit of public comment, the notice and public procedures 
requirements of the Administrative Procedure Act are inapplicable, 
pursuant to 5 U.S.C. 553(a)(2).
    Since no notice of proposed rulemaking is required, the provisions 
of the Regulatory Flexibility Act (5 U.S.C. 601, et seq.) do not apply.
    There is no new collection of information contained in this 
proposed rule, and, therefore, the Paperwork Reduction Act does not 
apply. The collections of information of 31 CFR Part 356 have been 
previously 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 1535-0112. Under this 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.

List of Subjects in 31 CFR Part 356

    Bonds, Federal Reserve System, Government securities, Securities.

    Dated: September 23, 1996.
Donald V. Hammond,
Deputy Fiscal Assistant Secretary.

    For the reasons set forth in the preamble, 31 CFR Chapter II, 
Subchapter B, Part 356, is proposed to be amended as follows:

PART 356--SALE AND ISSUE OF MARKETABLE BOOK-ENTRY TREASURY BILLS, 
NOTES, AND BONDS (DEPARTMENT OF THE TREASURY CIRCULAR, PUBLIC DEBT 
SERIES NO. 1-93)

    1. The authority citation for part 356 continues to read as 
follows:

    Authority: 5 U.S.C. 301; 31 U.S.C. 3102, et seq.; 12 U.S.C. 391.

    2. Section 356.2 is amended by revising the definitions of 
``Accrued interest,'' ``Book-entry security,'' ``Customer,'' ``Interest 
Rate,'' ``Multiple-price auction,'' ``Par amount,'' ``Settlement 
amount,'' ``STRIPS,'' and ``Yield;'' and adding in alphabetical order 
the definitions of ``Business day,''

[[Page 50930]]

``Consumer Price Index,'' ``Daily interest decimal,'' ``Index,'' 
``Index ratio,'' ``Inflation-adjusted principal,'' ``Real yield,'' and 
``Reference CPI'' to read as follows:


Sec. 356.2  Definitions.

* * * * *
    Accrued interest means an amount payable to the Department for such 
part of the next semiannual interest payment that represents interest 
income attributed to the period prior to the date of issue. (See 
Appendix B, Section I, Paragraph C.)
* * * * *
    Book-entry security means a security the issuance and maintenance 
of which are represented by an accounting entry or electronic record 
and not by a certificate. Treasury book-entry securities may generally 
be held in either TRADES or in TREASURY DIRECT. (See Sec. 356.3.)
    Business day means any day other than a Saturday, Sunday, or other 
day on which the Federal Reserve Banks are not open for business.
* * * * *
    Consumer Price Index (CPI) means the non-seasonally adjusted U.S. 
City Average All Items Consumer Price Index for All Urban Consumers, 
published by the Bureau of Labor Statistics of the Department of Labor. 
(See Appendix D.)
* * * * *
    Customer means a bidder on whose behalf a depository institution or 
dealer has been directed to submit or forward a competitive or 
noncompetitive bid for a specified amount of securities in a specific 
auction. Only depository institutions and dealers may submit or forward 
bids for customers, whether directly to a Federal Reserve Bank or the 
Bureau of the Public Debt, or through an intermediary depository 
institution or dealer.
    Daily interest decimal means, for a fixed-principal security, the 
interest factor attributable to one day of an interest payment period 
per $1,000 par amount.
* * * * *
    Index means the Consumer Price Index, which is used as the basis 
for making adjustments to principal amounts of inflation-protection 
securities. (See Appendix D.)
    Index ratio means, for any particular date and any particular 
inflation-protection security, the Reference CPI applicable to such 
date divided by the Reference CPI applicable to the original issue date 
(or dated date, when the dated date is different from the original 
issue date). (See Appendix B, Section I, Paragraph B.)
    Inflation-adjusted principal means, for an inflation-protection 
security, the value of the security derived by multiplying the par 
amount by the applicable index ratio as described in Appendix B, 
Section I, Paragraph B.
    Interest rate means the annual percentage rate of interest paid on 
the par amount or the inflation-adjusted principal of a specific issue 
of notes or bonds. (See Appendix B for methods and examples of interest 
calculations on notes and bonds.)
* * * * *
    Multiple-price auction means an auction in which each successful 
competitive bidder pays the price equivalent to the yield or rate that 
it bid.
* * * * *
    Par amount means the stated value of a security at original 
issuance.
* * * * *
    Real yield means, for an inflation-protection security, the yield 
based on the payment stream in constant dollars, i.e., before 
adjustment by the index ratio.
    Reference CPI (Ref CPI) means, for an inflation-protection 
security, the index number applicable to a given date. (See Appendix B, 
Section I, Paragraph B.)
* * * * *
    Settlement amount means the par amount of securities awarded less 
any discount amount and plus any premium amount and/or any accrued 
interest. For inflation-protection securities, the settlement amount 
also includes any inflation adjustment when such securities are 
reopened or when the dated date is different from the issue date.
* * * * *
    STRIPS (Separate Trading of Registered Interest and Principal of 
Securities) means the Department's program under which eligible 
securities are authorized to be separated into principal and interest 
components, and transferred separately. These components are maintained 
in book-entry accounts, and transferred, in TRADES.
* * * * *
    Yield, also referred to as ``yield to maturity,'' means the 
annualized rate of return to maturity on a fixed-principal security 
expressed as a percentage. For an inflation-protection security, yield 
means the real yield. (See Appendix B.)
    3. Section 356.3 is amended by revising the introductory paragraph 
and the heading of paragraph (a) and removing footnote 1; adding three 
sentences at the end of paragraph (a); and adding a second sentence at 
the end of paragraph (b), to read as follows:


Sec. 356.3  Book-entry securities and systems.

    Securities issued subject to this Part shall be held and 
transferred in either of the two book-entry securities systems--TRADES 
or TREASURY DIRECT--described in this section. Securities are 
maintained and transferred, to the extent authorized in 31 CFR 357, in 
these two book-entry systems at their par amount, e.g., for inflation-
protection securities, adjustments for inflation will not be included 
in this amount. Securities may be transferred from one system to the 
other in accordance with Treasury regulations governing book-entry 
Treasury bills, notes, and bonds. See Department of the Treasury 
Circular, Public Debt Series No. 2-86, as amended (31 CFR Part 357).
    (a) Treasury/Reserve Automated Debt Entry System (TRADES). * * * 
For accounts maintained in TRADES, Treasury discharges its payment 
obligations when payment is credited to the applicable account 
maintained at a Federal Reserve Bank or payment is made in accordance 
with the instructions of the person or entity maintaining such account. 
Further, neither Treasury nor the Federal Reserve Banks have any 
obligations to, nor will they recognize any claims of, any person or 
entity that does not have an account at a Federal Reserve Bank. In 
addition, neither Treasury nor the Federal Reserve Banks will recognize 
the claims of any person or entity with respect to any accounts not 
maintained at a Federal Reserve Bank.
    (b) * * * In TREASURY DIRECT, Treasury discharges its payment 
obligations when payment is made to a depository institution for credit 
to the account specified by the owner of the security, or when payment 
is made in accordance with the instructions of the owner of the 
security.
* * * * *
    4. Section 356.5 is amended by revising the introductory text and 
paragraphs (b) and (c) to read as follows:


Sec. 356.5  Description of securities.

    Securities offered pursuant to this Part are offered exclusively in 
book-entry form and are direct obligations of the United States, issued 
under Chapter 31 of Title 31 of the United States Code. The securities 
are subject to the terms and conditions set forth in this Part, 
including the appendices, as well as the regulations governing book-
entry Treasury bills, notes, and bonds (31 CFR Part 357), and the 
offering announcements, all to the extent applicable. When the 
Department issues additional securities with the same CUSIP number as 
outstanding

[[Page 50931]]

securities, all securities with the same CUSIP number are considered 
the same security.
* * * * *
    (b) Treasury notes--(1) Treasury fixed-principal \1\ notes. 
Treasury fixed-principal notes are issued with a stated rate of 
interest to be applied to the par amount, have interest payable 
semiannually, and are redeemed at their par amount at maturity. They 
are sold at discount, par, or premium, depending upon the auction 
results. They have maturities of at least one year, but not more than 
ten years.
---------------------------------------------------------------------------

    \1\ The term ``fixed-principal'' is used in this Part to 
distinguish such securities from ``inflation-protection'' 
securities. Fixed-principal notes and fixed-principal bonds are 
referred to as ``notes'' and ``bonds'' in official Treasury 
publications, such as offering announcements and auction results 
press releases, as well as in auction systems.
---------------------------------------------------------------------------

    (2) Treasury inflation-protection notes. Treasury inflation-
protection notes are issued with a stated rate of interest to be 
applied to the inflation-adjusted principal on each interest payment 
date, have interest payable semiannually, and are redeemed at maturity 
at their inflation-adjusted principal, or at their par amount, 
whichever is greater. They are sold at discount, par, or premium, 
depending upon the auction results. They have maturities of at least 
one year, but not more than ten years. (See Appendix B for price and 
interest payment calculations and Appendix C for Investment 
Considerations.)
    (c) Treasury bonds--(1) Treasury fixed-principal bonds. Treasury 
fixed-principal bonds are issued with a stated rate of interest to be 
applied to the par amount, have interest payable semiannually, and are 
redeemed at their par amount at maturity. They are sold at discount, 
par, or premium, depending upon the auction results. They typically 
have maturities of more than ten years.
    (2) Treasury inflation-protection bonds. Treasury inflation-
protection bonds are issued with a stated rate of interest to be 
applied to the inflation-adjusted principal on each interest payment 
date, have interest payable semiannually, and are redeemed at maturity 
at their inflation-adjusted principal, or at their par amount, 
whichever is greater. They are sold at discount, par, or premium, 
depending upon the auction results. They typically have maturities of 
more than ten years. (See Appendix B for price and interest payment 
calculations and Appendix C for Investment Considerations.)
    5. Section 356.10 is amended by adding a sentence at the end of the 
paragraph, before the parenthetical last sentence, to read as follows:


Sec. 356.10  Offering announcement.

    * * * Accordingly, bidders should read the applicable offering 
announcement in conjunction with this Part. * * *
    6. Section 356.12 is amended by revising the first sentence of 
paragraph (a); revising paragraphs (b)(2), (c)(1) (i) and (ii); and 
adding new paragraph (c)(1)(iii) to read as follows:


Sec. 356.12  Noncompetitive and competitive bidding.

    (a) General. All bids, including bids for reopenings, must state 
the par amount of securities bid for and must equal or exceed the 
minimum bid amount stated in the offering announcement. * * *
    (b) * * *
    (2) Additional restrictions. A bidder may not bid noncompetitively 
for its own account if, in the security being auctioned, it holds or 
has held a position in when-issued trading or in futures or forward 
contracts at any time between the date of the offering announcement and 
the designated closing time for the receipt of competitive tenders. * * 
*
    (c) * * *
    (1) * * *
    (i) Treasury bills. A competitive bid must show the discount rate 
bid, expressed with two decimals, e.g., 3.10. Fractions may not be 
used.
    (ii) Treasury fixed-principal securities. A competitive bid must 
show the yield bid, expressed with three decimals, e.g., 4.170. 
Fractions may not be used.
    (iii) Treasury inflation-protection securities. A competitive bid 
must show the real yield bid, expressed with three decimals, e.g., 
3.070. Fractions may not be used.
* * * * *
    7. Section 356.13 is amended by revising paragraph (a) to read as 
follows:


Sec. 356.13  Net long position.

    (a) Reporting net long positions. When bidding competitively, a 
bidder must report the amount of its net long position when the total 
of all of its bids in an auction plus the bidder's net long position in 
the security being auctioned equals or exceeds the net long position 
reporting threshold amount. The threshold amount for any particular 
security will be as stated in the offering announcement for that 
security. (See Sec. 356.10.) That amount will be $2 billion for bills, 
notes, and bonds unless otherwise stated in the offering announcement. 
For example, the net long position reporting threshold amount may be 
less than $2 billion for smaller security offerings, e.g., certain 
inflation-protection securities or cash management bills. If the bidder 
either has no position or has a net short position and the total of all 
of its bids equals or exceeds the threshold amount, e.g., $2 billion, a 
net long position of zero must be reported. * * *
* * * * *
    8. Section 356.17 is amended by revising the last sentence in the 
introductory paragraph and the introductory text of paragraphs (a) and 
(b) to read as follows:


Sec. 356.17  Responsibility for payment.

    * * * The specific requirements, outlined in this section, depend 
on whether awarded securities will be delivered in TREASURY DIRECT or 
TRADES.
    (a) TREASURY DIRECT. For securities to be held in TREASURY DIRECT, 
payment of the par amount and announced accrued interest and/or 
inflation adjustment, if any, must be submitted with the tender unless 
other provision has been made, such as provision for payment by charge 
to the funds account of a depository institution.
* * * * *
    (b) TRADES. For securities to be held in TRADES, payment of the par 
amount and announced accrued interest and/or inflation adjustment, if 
any, must be submitted with the tender unless provision has been made 
for payment by charge to the funds account of a depository institution.
* * * * *
    9. Section 356.20 is amended by revising the introductory text of 
paragraph (c) and adding a sentence to the end of paragraph (c)(2) to 
read as follows:


Sec. 356.20  Determination of auction awards.

* * * * *
    (c) Determining purchase prices for awarded securities. Price 
calculations will be rounded to three decimal places on the basis of 
price per hundred, e.g., 99.954. (See Appendix B.)
* * * * *
    (2) * * * For inflation-protection securities, the price of such 
securities will be the price equivalent to the highest real yield at 
which bids were accepted.
    10. Section 356.25 is amended by revising the last sentence in 
paragraph (a)(2), and adding paragraph (c) to read as follows:


Sec. 356.25  Payment for awarded securities.

* * * * *
    (a) * * *
    (2) * * * Such additional amount may be due if the auction 
calculations result

[[Page 50932]]

in a premium or if accrued interest and/or inflation adjustment is due.
* * * * *
    (c) Amount of payment for awarded securities. The payment amount 
for awarded securities will be the settlement amount as defined in 
Sec. 356.2. (See formulas in Appendix B.)
    11. Section 356.30 is amended by redesignating the text of the 
current section as (a), adding a heading of ``General'' and revising 
the last sentence in newly redesignated paragraph (a), and adding 
paragraph (b) to read as follows:


Sec. 356.30  Payment of principal and interest on notes and bonds.

    (a) General. * * * In the event any principal or interest payment 
date is not a business day, the amount is payable (without additional 
interest) on the next business day.
    (b) Treasury inflation-protection securities. If at maturity the 
inflation-adjusted principal is less than the par amount of the 
security, an additional amount will be paid at maturity so that the 
additional amount plus the inflation-adjusted principal equals the par 
amount. If a security has been stripped, any such additional amount 
will be paid at maturity to holders of principal components only. 
Regardless of whether or not an additional amount is paid, the final 
interest payment will be based on the inflation-adjusted principal at 
maturity.
    12. Section 356.31 is amended by revising paragraph (a) and the 
first sentence of paragraph (b), redesignating paragraphs (c) and (d) 
as paragraphs (g) and (h) respectively, adding new paragraphs (c) 
through (f), adding a third and fourth sentence to newly redesignated 
paragraph (g) and revising newly redesignated paragraph (h) to read as 
follows:


Sec. 356.31  STRIPS.

    (a) General. A note or bond may be designated in the offering 
announcement as eligible for the STRIPS program. At the option of the 
holder, and generally at any time from its issue date until its call or 
maturity, any such security may be ``stripped,'' i.e., divided into 
separate principal and interest components. A short or long first 
interest payment and all interest payments within a callable period are 
not eligible to be stripped from the principal component. The CUSIP 
numbers and payment dates for the principal and interest components are 
provided in the offering announcement if not previously announced.
    (b) Minimum par amounts required for STRIPS. For a note or bond to 
be stripped into the components described above, the par amount, which 
is not adjusted for inflation, of the note or bond must be in an amount 
that, based on its interest rate, will produce a semiannual interest 
payment in a multiple of $1,000. * * *
    (c) Principal components stripped from fixed-principal securities. 
Principal components stripped from fixed-principal securities are 
maintained in accounts, and transferred, in TRADES at their par amount. 
The principal components have a CUSIP number that is different from the 
CUSIP number of the fully-constituted (unstripped) security.
    (d) Interest components stripped from fixed-principal securities. 
Interest components stripped from fixed-principal securities are 
maintained in accounts, and transferred, in TRADES at their original 
payment value, which is derived by applying the semiannual interest 
rate to the par amount. When an interest component is created, the 
interest payment date becomes the maturity date for the component. All 
such components with the same maturity date have the same CUSIP number, 
regardless of the underlying security from which the interest payments 
were stripped. All interest components have CUSIP numbers that are 
different from the CUSIP number of any fully-constituted security and 
any principal component.
    (e) Principal components stripped from inflation-protection 
securities. Principal components stripped from inflation-protection 
securities are maintained in accounts, and transferred, in TRADES at 
their par amount. At maturity, the holder will receive the inflation-
adjusted principal value or the par amount, whichever is greater. (See 
Sec. 356.30.) Principal components have a CUSIP number that is 
different from the CUSIP number of the fully-constituted (unstripped) 
security.
    (f) Interest components stripped from inflation-protection 
securities. Interest components stripped from inflation-protection 
securities are maintained in accounts, and transferred, in TRADES at 
their original payment value, which is derived by applying the 
semiannual interest rate to the par amount. When an interest component 
is created, the interest payment date becomes the maturity date for the 
component. Each such component has a unique CUSIP number that is 
different from the CUSIP number of any interest components stripped 
from different securities, even if the components have the same 
maturity date. All interest components have CUSIP numbers that are 
different from the CUSIP number of any fully-constituted security and 
any principal component. At maturity, the payment to the holder will be 
derived by applying the semiannual interest rate to the inflation-
adjusted principal of the underlying security.
    (g) Reconstituting a security. * * * Interest components stripped 
from inflation-protection securities are different from interest 
components stripped from fixed-principal securities and, accordingly, 
are not interchangeable for reconstitution purposes. Interest 
components stripped from one inflation-protection security are not 
interchangeable for reconstitution purposes with interest components 
stripped from another inflation-protection security.
    (h) Applicable regulations. Unless otherwise provided in this Part, 
notes and bonds stripped into their STRIPS components are governed by 
Subparts A, B and D of Part 357 of this title.
    13. Section 356.32 is revised to read as follows:


Sec. 356.32  Taxation.

    (a) General. Securities issued under this Part are subject to all 
applicable taxes imposed under the Internal Revenue Code of 1986, or 
successor. Under section 3124 of Title 31, United States Code, the 
securities are exempt from taxation by a State or political subdivision 
of a State, except for State estate or inheritance taxes and other 
exceptions as provided in that section.
    (b) Treasury inflation-protection securities. Special federal 
income tax rules for inflation-protection securities, and principal and 
interest components stripped from such securities, are set forth in 
Internal Revenue Service regulations.
    14. Appendix B to Part 356 is amended by revising the list of 
section titles, and adding two new paragraphs following the list to 
read as follows:

Appendix B to Part 356--Formulas and Tables

I. Computation of Interest on Treasury Bonds and Notes.
II. Formulas for Conversion of Fixed-Principal Security Yields to 
Equivalent Prices.
III. Formulas for Conversion of Inflation-Protection Security Yields 
to Equivalent Prices.
IV. Computation of Purchase Price, Discount Rate, and Investment 
Rate (Coupon-Equivalent Yield) for Treasury Bills.

    The numbers in this appendix are examples given for illustrative 
purposes only and are in no way a prediction of interest rates on any 
bills, notes, or bonds issued under this Part.
    In some of the following examples, intermediate rounding is used to 
allow

[[Page 50933]]

the reader to follow the calculations. In actual practice, the 
Department generally does not round prior to determining the final 
result.
    15. Appendix B, Section I is amended as follows: by redesignating 
paragraphs A through D and their corresponding Examples as paragraphs 
A.1. through A.4. respectively, and adding a new title for paragraph A, 
revising newly redesignated paragraph A.1., revising the first sentence 
in newly redesignated paragraphs A.2., A.3. and its Example, and A.4. 
and its Example; by adding a new paragraph B; and by redesignating 
paragraph E as paragraph C, revising the second paragraph, adding a 
third paragraph prior to the Examples in newly redesignated paragraph 
C., redesignating the headings for Examples C. (1) and (2) as C.(1)(i) 
and C.(1)(ii) respectively, and adding a new heading for Example C.(1).

I. Computation of Interest on Treasury Bonds and Notes

A. Treasury Fixed-Principal Securities

1. Regular Half-Year Payment Period
    Interest on marketable fixed-principal securities is payable on a 
semiannual basis. The regular interest payment period is a full half-
year of six calendar months. Examples of half-year periods are: (1) 
February 15 to August 15, (2) May 31 to November 30, and (3) February 
29 to August 31 (in a leap year). Calculation of an interest payment 
for a fixed-principal security with a par amount of $1,000 and an 
interest rate of 8% is made in this manner: ($1,000  x  .08) $40. 
Specifically, a semiannual interest payment represents one half of one 
year's interest, and is computed on this basis regardless of the actual 
number of days in the half-year.
2. Daily Interest Decimal
    In cases where an interest payment period for a fixed-principal 
security is shorter or longer than six months or where accrued interest 
is payable by an investor, a daily interest decimal, based on the 
actual number of days in the half-year or half-years involved, must be 
computed. ***
* * * * *
3. Short First Payment Period
    In cases where the first interest payment period for a fixed-
principal security covers less than a full half-year period (a ``short 
coupon''), the daily interest decimal is multiplied by the number of 
days from, but not including, the issue date to, and including, the 
first interest payment date, resulting in the amount of the interest 
payable per $1,000 par amount.* * *

    Example. A 2-year fixed-principal note paying 8\3/8\% interest 
was issued on July 2, 1990, with the first interest payment on 
December 31, 1990. * * *
4. Long First Payment Period
    In cases where the first interest payment period for a fixed-
principal security covers more than a full half-year period (a ``long 
coupon''), the daily interest decimal is multiplied by the number of 
days from, but not including, the issue date to, and including, the 
last day of the fractional period that ends one full half-year before 
the interest payment date. * * *

    Example. A 5-year 2-month fixed-principal note paying 7-7/8% 
interest was issued on December 3, 1990, with the first interest 
payment due on August 15, 1991. * * *

B. Treasury Inflation-Protection Securities

1. Indexing Process
    Interest on marketable Treasury inflation-protection securities is 
payable on a semiannual basis. The inflation-protection securities are 
issued with a stated rate of interest which remains constant for the 
term of the particular security. Interest payments are based on the 
security's inflation-adjusted principal at the time interest is paid. 
This adjustment is made by multiplying the par amount of the security 
by the applicable index ratio.
2. Index Ratio
    The numerator of the Index ratio, the Ref CPIDate, is the index 
number applicable for a specific day, and the denominator of the Index 
ratio is the Ref CPI applicable for the original issue date. However, 
when the dated date is different from the original issue date, the 
denominator is the Ref CPI applicable for the dated date. The formula 
for calculating the Index ratio is:
[GRAPHIC] [TIFF OMITTED] TP27SE96.000

Where Date = valuation date

    Treasury does not intend to publish the Index ratio for use by 
market participants. Rather dealers, financial institutions, and other 
market participants that need the Index ratio for trading purposes are 
expected to calculate the ratio using the formula provided above.
3. Reference CPI
    The Ref CPI for the first day of any calendar month is the CPI for 
the third preceding calendar month. For example, the Ref CPI applicable 
to April 1 in any year is the CPI for January, which is reported in 
February. The Ref CPI for any other day of a month is determined by a 
linear interpolation between the Ref CPI applicable to the first day of 
the month in which such day falls (in the example, January) and the Ref 
CPI applicable to the first day of the month immediately following (in 
the example, February). For purposes of interpolation, calculations 
with regard to the Ref CPI and the Index ratio for a specific date will 
be truncated to six decimal places and rounded to five decimal places 
such that the Ref CPI and the Index ratio for that date will be 
expressed to five decimal places. The formula for the Ref CPI for a 
specific date is:
[GRAPHIC] [TIFF OMITTED] TP27SE96.001

Where Date = valuation date

D = the number of days in the month in which Date falls
t = the calendar day corresponding to Date
Ref CPIM = Ref CPI for the first day of the calendar month in which 
Date falls
Ref CPIM + 1 = Ref CPI for the first day of the calendar month 
immediately following Date

    For example, the Ref CPI for April 15, 1996 is calculated as 
follows:

[GRAPHIC] [TIFF OMITTED] TP27SE96.002


[[Page 50934]]


where D = 30, t = 15

Ref CPIApril 1, 1966 = 154.40, the nonseasonally adjusted CPI-U 
for January 1996.
Ref CPIMay 1, 1966 = 154.90, the nonseasonally adjusted CPI-U for 
February 1996.

    Putting these values in the equation above:
    [GRAPHIC] [TIFF OMITTED] TP27SE96.003
    
    This value truncated to six decimals is 154.633333; rounded to five 
decimals it is 154.63333.
    To calculate the index ratio for April 16, 1996, for an inflation-
protection security issued on April 15, 1996, the Ref CPIApril 16, 
1966 must first be calculated. Using the same values in the equation 
above except that t=16, the Ref CPIApril 16, 1966 is 154.65000.
    The index ratio for April 16, 1996 is: Index RatioApril 16, 
1966 = 154.65000/154.63333 = 1.000107803.
    This value truncated to six decimals is 1.000107; rounded to five 
decimals it is 1.00011.
4. Index Contingencies
    If a previously reported CPI is revised, Treasury will continue to 
use the previously reported CPI in calculating the principal value or 
interest payments.
    If the CPI is rebased to a different year, Treasury will continue 
to use the CPI based on the base reference period in effect when the 
security was first issued, as long as that CPI continues to be 
published.
    If the CPI is discontinued or substantially altered while an 
inflation-protection security is outstanding, Treasury will consult 
with the Bureau of Labor Statistics, or any successor agency, to 
determine an appropriate substitute index and methodology for linking 
the two series. Treasury will then notify the public of the substitute 
index and methodology. Determinations of the Secretary in this regard 
will be final.
    If the CPI for a particular month is not reported by the last day 
of the following month, the Treasury will announce an index number 
based on the last twelve-month change in the CPI available. Any 
calculations of the Treasury's payment obligations on the inflation-
protection security that rely on that month's CPI will be based on the 
index number that the Treasury has announced. For example, if the CPI 
for month M is not reported timely, the formula for calculating the 
index number to be used is:
[GRAPHIC] [TIFF OMITTED] TP27SE96.004

    This index number will be used for all subsequent calculations that 
rely on that month's index number and will not be replaced by the 
actual CPI when it is reported.
    Generalizing for the last reported CPI issued N months prior to 
month M:
[GRAPHIC] [TIFF OMITTED] TP27SE96.005

5. Computation of Interest for a Regular Half-Year Payment Period
    Interest on marketable Treasury inflation-protection securities is 
payable on a semiannual basis. The regular interest payment period is a 
full half-year or six calendar months. Examples of half-year periods 
are January 15 to July 15, and April 15 to October 15. An interest 
payment will be a fixed percentage of the value of the inflation-
adjusted principal, in current dollars, for the date on which it is 
paid. Interest payments will be calculated by multiplying one-half of 
the specified annual interest rate for the inflation-protection 
securities by the inflation-adjusted principal for the interest payment 
date. Specifically, a semiannual interest payment is computed on the 
basis of one half of one year's interest regardless of the actual 
number of days in the half-year.

    Example. A 10-year inflation-protection note paying 3% interest 
was issued on July 15, 1996, with the first interest payment on 
January 15, 1997. The Ref CPI on July 15, 1996 (Ref CPIIssue 
Date) was 120, and the Ref CPI on January 15, 1997 (Ref 
CPIDate) was 132. For a par amount of $100,000, the inflation 
adjusted principal on January 15, 1997 was (132/120)  x  $100,000, 
or $110,000. This amount was then multiplied by .03/2, or .015, 
resulting in a payment of $1,650.00.

C. Accrued Interest

 * * * * *
    For a fixed-principal security, if accrued interest covers a 
fractional portion of a full half-year period, the number of days in 
the full half-year period and the stated interest rate will determine 
the daily interest decimal to be used in computing the accrued 
interest. The decimal is multiplied by the number of days for which 
interest has accrued. If a reopened fixed-principal security has a long 
first interest payment period (a ``long coupon''), and the dated date 
for the reopened issue is less than six full months before the first 
interest payment, the accrued interest will fall into two separate 
half-year periods, and a separate daily interest decimal must be 
multiplied by the respective number of days in each half-year period 
during which interest has accrued. All accrued interest computations 
are rounded to five decimal places for a $1,000 inflation-adjusted 
principal, using normal rounding procedures. Accrued interest for a par 
amount of securities greater than $1,000 is calculated by applying the 
appropriate multiple to accrued interest payable for $1,000 par amount, 
rounded to five decimal places.
    For an inflation-protection security, accrued interest will be 
calculated as shown in Section III, Paragraphs A and B of this 
Appendix.

Examples. (1) Fixed-Principal Securities
    (i) Involving One Half-Year: * * *
    (ii) Involving Two Half-Years: * * *
16. Appendix B, Section II is amended by removing footnote 1, revising 
the Section heading, revising the definition of ``C='', and revising 
the headings of paragraphs A through G to read as follows:

II. Formulas for Conversion of Fixed-Principal Security Yields to 
Equivalent Prices

Definitions

* * * * *
C = the regular annual interest per $100, payable semiannually, e.g., 
10.125 (the dollar equivalent of a 10-\1/8\% interest rate)
* * * * *

[[Page 50935]]

    A. For fixed-principal securities with a regular first interest 
payment period:
* * * * *
    B. For fixed-principal securities with a short first interest 
payment period:
* * * * *
    C. For fixed-principal securities with a long first interest 
payment period:
* * * * *
    D. (1) For fixed-principal securities reopened during a regular 
interest period where the purchase price includes predetermined accrued 
interest.
    (2) For new fixed-principal securities accruing interest from the 
coupon frequency date immediately preceding the issue date, with the 
interest rate established in the auction being used to determine the 
accrued interest payable on the issue date.
* * * * *
    E. For fixed-principal securities reopened during the regular 
portion of a long first payment period:
* * * * *
    F. For fixed-principal securities reopened during a short first 
payment period:
* * * * *
    G. For fixed-principal securities reopened during the fractional 
portion (initial short period) of a long first payment period:
* * * * *
    17. Appendix B is amended by redesignating Section III as Section 
IV and adding a new Section III to read as follows:

III. Formulas for Conversion of Inflation-Protection Security 
Yields to Equivalent Prices

 Definitions

P = unadjusted or real price per 100 (dollars)
Padj = inflation adjusted price; P  x  Index RatioDate
A = unadjusted accrued interest per $100 original principal
Aadj = inflation adjusted accrued interest; A  x  Index 
RatioDate 
SA = settlement amount including accrued interest in current dollars 
per $100 original principal; Padj + Aadj
r = days from settlement date to next coupon date
s = days in current semiannual period
i = real yield, expressed in decimals (e.g., 0.0325)
C = real annual coupon, payable semiannually, in terms of real dollars 
paid on $100 initial, or real, principal of the security
n = number of full semiannual periods from issue date to maturity date, 
except that, if the issue date is a coupon frequency date, n will be 
one less than the number of full semiannual periods remaining until 
maturity. Coupon frequency dates are the two semiannual dates based on 
the maturity date of each note or bond issue. For example, a security 
maturing on July 15, 2026 would have coupon frequency dates of January 
15 and July 15.
vn = 1/(1 + i/2)n
[GRAPHIC] [TIFF OMITTED] TP27SE96.049

Date = valuation date
D=the number of days in the month in which Date falls
t=calendar day corresponding to Date
CPI=Consumer Price Index number
Ref CPIM=reference CPI for the first day of the calendar month in 
which Date falls
Ref CPIM+1=reference CPI for the first day of the calendar month 
immediately following Date
Ref CPIDate=Ref CPIM+[(t-1)/D][Ref CPIM+1-Ref CPIM]
Index RatioDate=Ref CPIDate/Ref CPIIssue Date
    A. For inflation-protection securities with a regular first 
interest payment period:
    Formulas:
    [GRAPHIC] [TIFF OMITTED] TP27SE96.006
    
Padj=P x Index RatioDate
A=[(s-r)/s] x (C/2)
Aadj=A x Index RatioDate
SA=Padj+Aadj
Index RatioDate=Ref CPIDate/Ref CPIIssue Date

    Example. The Treasury issues a 10-year inflation- protection note 
on July 15, 1996. The note is issued at a discount to yield 3.1% 
(real). The note bears a 3% real coupon, payable on January 15 and July 
15 of each year. The base CPI index applicable to this note is 120.\1\ 
Calculate the settlement amount.

    \1\ This number is normally derived using the interpolative 
process described in Appendix B, Section I, Paragraph B.
---------------------------------------------------------------------------

    Definitions:

C=3.00
i=0.0310
n=19 (There are 20 full semiannual periods but n is reduced by 1 
because the issue date is a coupon frequency date.)
r=184 (July 15, 1996 to January 15, 1997)
s=184 (July 15, 1996 to January 15, 1997)
Ref CPIDate=120
Ref CPIIssue Date=120

    Resolution:

Index RatioDate=Ref CPIDate/Ref CPIIssue Date=120/120=1
A=[(184-184)/184] x \3/2\=0
Aadj=0 x 1=0
vn=1/(1+i/2)n=1/(1+.031/2)\19\=0.74658863
[GRAPHIC] [TIFF OMITTED] TP27SE96.045

[GRAPHIC] [TIFF OMITTED] TP27SE96.007

P=99.14578432
Padj=P x Index RatioDate
Padj=99.14578432 x 1=99.14578432
SA=Padj+Aadj
SA=99.14578432+0=99.14578432
    B. For inflation-protection securities reopened during a regular 
interest period where the purchase price includes predetermined accrued 
interest:
    Bidding:
    The dollar amount of each bid is in terms of the par amount. For 
example, if the Ref CPI applicable to the issue date of the bond is 
120, and the reference CPI applicable to the reopening issue date is 
132, a bid of

[[Page 50936]]

$10,000 will in effect be a bid of $10,000 x (132/120), or $11,000.
    Formulas:
    [GRAPHIC] [TIFF OMITTED] TP27SE96.008
    
Padj=P x Index RatioDate
A=[(s-r)/s] x (C/2)
Aadj = A  x  Index RatioDate
SA = Padj + Aadj
Index RatioDate = Ref CPIDate/Ref CPIIssue Date
    Example. A 3% 10-year inflation-protection note was issued July 
15, 1996, due July 15, 2006, with interest payments on January 15 
and July 15. For a reopening on April 15, 1997, with inflation 
compensation accruing from July 15, 1996 to April 15, 1997, and 
accrued interest accruing from January 15, 1997 to April 15, 1997, 
(90 days) solve for the price per 100 (P) at a real yield, as 
determined in the reopening auction, of 3.40%. The base index 
applicable to the issue date of this note is 120 and the reference 
CPI applicable to April 15, 1997, is 132.

    Definitions:

C = 3.00
i = 0.0340
n = 18
r = 91 (April 15, 1997, to July 15, 1997)
s = 181 (January 15, 1997, to July 15, 1997)
Ref CPIDate = 132
Ref CPIIssue Date = 120

    Resolution:

Index RatioDate = Ref CPIDate/Ref CPIIssue Date = 132/
120 = 1.100
vn = 1/(1 + i/2)a = 1/(1 + .0340/2)18 = 0.73828296
[GRAPHIC] [TIFF OMITTED] TP27SE96.047

[GRAPHIC] [TIFF OMITTED] TP27SE96.009

P = 96.841049
Padj = P  x  Index RatioDate
Padj = 96.841049  x  1.100 = 106.525154
A = [(181-91)/181]  x  3/2 = 0.745856
Aadj = A  x  1.100 = 0.820442
SA = Padj + Aadj = 106.525154 + 0.820442
SA = 107.345596
* * * * *
    18. Part 356 is amended by adding new Appendixes C and D to read as 
follows:

Appendix C to Part 356--Investment Considerations

I. Inflation-Protection Securities

A. Principal and Interest Variability

    An investment in securities with principal or interest determined 
by reference to an inflation index involves factors not associated with 
an investment in a fixed-principal security. Such factors may include, 
without limitation, the possibility that the inflation index may be 
subject to significant changes, that changes in the index may or may 
not correlate to changes in interest rates generally or with changes in 
other indices, that the resulting interest may be greater or less than 
that payable on other securities of similar maturities, and that, in 
the event of sustained deflation, the amount of the semiannual interest 
payments, the inflation-adjusted principal of the security, and the 
value of stripped components, will decrease. However, if at maturity 
the inflation-adjusted principal is less than a security's par amount, 
an additional amount will be paid at maturity so that the additional 
amount plus the inflation-adjusted principal equals the par amount. 
Regardless of whether or not such an additional amount is paid, 
interest payments will always be based on the inflation-adjusted 
principal as of the interest payment date. If a security has been 
stripped, any such additional amount will be paid at maturity to 
holders of principal components only. (See Sec. 356.30.)

B. Trading in the Secondary Market

    The Treasury securities market is the largest and most liquid 
securities market in the world. While Treasury expects that there will 
be an active secondary market for inflation-protection securities, that 
market initially may not be as active or liquid as the secondary market 
for Treasury fixed-principal securities. In addition, as a new product, 
inflation-protection securities may not be as widely traded or as well 
understood as Treasury fixed-principal securities. Lesser liquidity and 
fewer market participants may result in larger spreads between bid and 
asked prices for inflation-protection securities than the bid-asked 
spreads for fixed-principal securities with the same time to maturity. 
Larger bid-asked spreads normally result in higher transaction costs 
and/or lower overall returns. The liquidity of an inflation-protection 
security may be enhanced over time as Treasury issues additional 
amounts or more entities participate in the market.

C. Tax Considerations

    Treasury inflation-protection securities and the stripped interest 
and principal components of these securities are subject to specific 
tax rules provided by Treasury regulations issued under sections 
1275(d) and 1286 of the Internal Revenue Code of 1986, as amended.

D. Indexing Issues

    While the CPI measures changes in prices for goods and services, 
movements in the CPI that have occurred in the past are not necessarily 
indicative of changes that may occur in the future.
    The calculation of the index ratio incorporates an approximate 
three-month lag, which may have an impact on the trading price of the 
securities, particularly during periods of significant, rapid changes 
in the index.
    The CPI is reported by the Bureau of Labor Statistics, a bureau 
within the Department of Labor. The Bureau of Labor Statistics operates 
independently of the Treasury and, therefore, Treasury has no control 
over the determination, calculation, or publication of the index. For a 
discussion of how the CPI will be applied in various situations, see 
Appendix B, Section I, Paragraph B.

Appendix D to Part 356--Description of the Consumer Price Index

    The Consumer Price Index (``CPI'') for purposes of inflation-
protection securities is the non-seasonally adjusted U.S. City Average 
All Items Consumer Price Index for All Urban Consumers, published 
monthly by the Bureau of Labor Statistics of the Department of Labor. 
The CPI is a measure of the average change in consumer prices over time 
in a fixed market basket of goods and services, including food, 
clothing, shelter, fuels, transportation, charges for doctors' and 
dentists' services, and drugs.
    In calculating the index, price changes for the various items are 
averaged together with weights that represent their importance in the 
spending of urban households in the United States. The contents of the 
market basket of goods and services and the weights assigned to the 
various items are updated periodically to take into account changes in 
consumer expenditure patterns.

[[Page 50937]]

    The CPI is expressed in relative terms in relation to a time base 
reference period for which the level is set at 100. For example, if the 
CPI for the 1982-84 reference period is 100.0, an increase of 16.5 
percent from that period would be shown as 116.5. The CPI for a 
particular month is released and published during the following month. 
From time to time, the CPI is rebased to a more recent base reference 
period. The base reference period for a particular inflation-protection 
security will be provided on the offering announcement for that 
security.
    Further details about the CPI may be obtained by contacting the 
Bureau of Labor Statistics.
    19. Exhibit A to Part 356 is amended by adding a new Section IV to 
the list of section titles and to the text of Exhibit A to read as 
follows:

Exhibit A to Part 356--Sample Announcements of Treasury Offerings to 
the Public

* * * * *

IV. Treasury Inflation-Protection Note Announcement

* * * * *

IV. Treasury Inflation-Protection Note Announcement

EMBARGOED UNTIL 2:30 P.M. October 2, 20XX
CONTACT: Office of Financing 202/219-3350
TREASURY TO AUCTION $5,500 MILLION OF 10-YEAR INFLATION-PROTECTION 
NOTES
    The Treasury will auction $5,500 million of 10-year inflation-
protection notes to raise cash. In addition, there is $7,906 million of 
publicly-held securities maturing October 15, 20XX.
    In addition to the public holdings, Federal Reserve Banks hold $327 
million of the maturing securities for their own accounts, which may be 
exchanged for additional amounts of the new securities.
    The maturing securities held by the public include $584 million 
held by Federal Reserve Banks as agents for foreign and international 
monetary authorities. Amounts bid for these accounts by Federal Reserve 
Banks will be added to the offering.
    The auction will be conducted in the single-price auction format. 
All competitive and noncompetitive awards will be at the highest yield 
of accepted competitive tenders.
    Tenders will be received at Federal Reserve Banks and Branches and 
at the Bureau of the Public Debt, Washington, D.C. This offering of 
Treasury securities is governed by the terms and conditions set forth 
in the Uniform Offering Circular (31 CFR Part 356) for the sale and 
issue by the Treasury to the public of marketable Treasury bills, 
notes, and bonds.
    Details about the new security are given in the attached offering 
highlights.

HIGHLIGHTS OF TREASURY OFFERING TO THE PUBLIC OF 10-YEAR INFLATION-
PROTECTION NOTES TO BE ISSUED OCTOBER 15, 20XX

October 2, 20XX

Offering Amount...........................  $5,500 million              
Description of Offering:                                                
Term and type of security.................  10-year inflation-protection
                                             notes                      
Series....................................  D-20XX                      
CUSIP number..............................  912XXX XX X                 
Auction date..............................  October 9, 20XX             
Issue date................................  October 15, 20XX            
Dated date................................  October 15, 20XX            
Maturity date.............................  October 15, 20XX            
Interest Rate.............................  Determined based on the     
                                             highest accepted bid       
Real yield................................  Determined at auction       
Interest payment dates....................  April 15 and October 15     
Minimum bid amount........................  $1,000                      
Multiples.................................  $1,000                      
Accrued interest payable by investor......  None                        
Premium or discount.......................  Determined at auction       
STRIPS Information:                                                     
Minimum amount required...................  Determined at auction       
Corpus CUSIP number.......................  912XXX XX X                 
                                                                        

    Due dates and CUSIP numbers for additional TINTs:

                                                                        
                                                                 912XXX 
                                                                        
April 15, 20XX...............................................       XX X
October 15, 20XX.............................................       XX X
April 15, 20XX...............................................       XX X
October 15, 20XX.............................................       XX X
April 15, 20XX...............................................       XX X
October 15, 20XX.............................................       XX X
April 15, 20XX...............................................       XX X
October 15, 20XX.............................................       XX X
April 15, 20XX...............................................       XX X
October 15, 20XX.............................................       XX X
April 15, 20XX...............................................       XX X
October 15, 20XX.............................................       XX X
April 15, 20XX...............................................       XX X
October 15, 20XX.............................................       XX X
April 15, 20XX...............................................       XX X
October 15, 20XX.............................................       XX X
April 15, 20XX...............................................       XX X
October 15, 20XX.............................................       XX X
April 15, 20XX...............................................       XX X
October 15, 20XX.............................................       XX X
                                                                        

Submission of Bids:
Noncompetitive bids: Will be accepted in full up to $5,000,000 at 
the highest accepted yield.

    Competitive bids:
    (1) Must be expressed as a real yield with three decimals, e.g., 
3.120%.
    (2) Net long position for each bidder must be reported when the 
sum of the total bid amount, at all yields, and the net long 
position is $____ billion or greater.
    (3) Net long position must be determined as of one half-hour 
prior to the closing time for receipt of competitive tenders.

Maximum Recognized Bid at a Single Yield: 35% of public offering
Maximum Award: 35% of public offering
Receipt of Tenders:
Noncompetitive tenders: Prior to 12:00 noon Eastern Daylight Saving 
time on auction day.
Competitive tenders: Prior to 1:00 p.m. Eastern Daylight Saving time 
on auction day.
Payment Terms: Full payment with tender or by charge to a funds 
account at a Federal Reserve Bank on issue date.
Indexing Information:
CPI Base Reference Period: 19XX-XX
Ref CPI 10/15/20XX: XXX.XXXXX

[FR Doc. 96-24860 Filed 9-25-96; 12:09 pm]
BILLING CODE 4810-39-W