[Federal Register Volume 64, Number 150 (Thursday, August 5, 1999)]
[Proposed Rules]
[Pages 42626-42629]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-19957]


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DEPARTMENT OF THE TREASURY

Fiscal Service

31 CFR Part 375


Marketable Treasury Securities Redemption Operations

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 (``Treasury'', ``We'', or 
``Us'') is publishing for comment proposed rules setting out the terms 
and conditions by which we may redeem outstanding, unmatured marketable 
Treasury securities. While we have not decided to conduct redemption 
operations, we are publishing this proposed rule to obtain comments on 
the mechanism by which we might conduct such operations. By 
establishing the mechanism in advance, we would be able to conduct 
redemption operations in a more timely and efficient way should such a 
decision be made.
    We would establish a new part in the Code of Federal Regulations 
for this purpose. The proposed rules describe a process by which an 
entity may submit competitive offers to sell us securities. The 
proposed rules also describe how we would announce the redemption 
operation results and the requirements for delivering securities to us 
and receiving payment.
    Redemption operations would help us better manage our financing 
needs, promote more efficient capital markets, and may lower financing 
costs for taxpayers.

DATES: Submit comments on or before October 4, 1999.

ADDRESSES: You may send us hardcopy comments at: Government Securities 
Regulations Staff, Bureau of the Public Debt, 999 E Street NW., Room 
315, Washington, DC 20239-0001. You may also send us comments by e-mail 
at [email protected]. When sending comments by e-mail, please use 
an ASCII file format and provide your full name and mailing address. 
Comments received will be available for public inspection and 
downloading from the Internet and for public inspection and copying at 
the Treasury Department Library, FOIA Collection, Room 5030, Main 
Treasury Building, 1500 Pennsylvania Avenue, NW., Washington, DC 20220. 
To visit the library, call (202) 622-0990 for an appointment.
    This proposed amendment is also available for downloading from 
Public Debt's web site at the following address: 
www.publicdebt.treas.gov.

FOR FURTHER INFORMATION CONTACT: Lori Santamorena (Acting Executive 
Director) or Chuck Andreatta (Senior Financial Advisor), Bureau of the 
Public Debt, Government Securities Regulations Staff, (202) 691-3632.

SUPPLEMENTARY INFORMATION:

I. Background

    The government's improved fiscal position has caused Treasury's 
borrowing needs to decline significantly, and we have been adjusting 
the government's borrowing program accordingly. Our adjustments to date 
have distributed the required cuts in borrowing across various 
maturities and sectors of the federal debt. In this environment, we 
began examining the concept of purchasing outstanding Treasury 
securities in the market. No decisions have been made to use a debt 
buy-back program, but having the infrastructure available to be able to 
use this tool would provide Treasury additional flexibility.
    Debt buy-backs could provide us with greater flexibility to manage 
the government's debt and to respond to our improved fiscal condition. 
First, buy-backs could enhance market liquidity by allowing us to 
maintain regular issuance of new benchmark securities across the 
maturity spectrum, in greater volume than otherwise. Over the long 
term, this enhanced liquidity could reduce the government's interest 
expense and promote more efficient capital markets.
    Second, buy-backs could enhance our ability to exert control over 
the maturity structure of the debt. Without a debt buy-back program, 
further reductions in Treasury new issue sizes and frequencies could be 
necessary. A buy-back program, however, would provide us the option of 
managing the maturity structure of the debt by selectively targeting 
the maturities of debt to be repurchased.
    Third, buy-backs could be used as a cash management tool, absorbing 
excess cash in periods such as late April when tax revenues greatly 
exceed immediate spending needs.
    In addition, although not a primary reason for conducting buy-
backs, we may occasionally be able to reduce the government's interest 
expense by purchasing ``off-the-run'' debt and replacing it with lower-
yield ``on-the-run'' debt.;1
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    \1\ A Treasury security is ``on-the-run'' when it is the newest 
security issue of its maturity (e.g., in October the two-year note 
issued September 30 would be ``on-the-run'' while the two-year note 
issued August 31 would be ``off-the-run''). An on-the-run security 
is normally the most liquid issue for that maturity.
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II. Analysis

    In a buy-back operation (a ``redemption operation'' in the proposed 
rule), we would redeem securities by purchasing them from current 
owners. The most equitable method for determining redemption prices is 
through a process in which market participants submit competitive 
offers to sell particular Treasury securities to the Treasury. We 
welcome comments about this proposed methodology.
    Under the proposal, we would announce our intention to purchase 
specified Treasury securities, including the approximate total amount 
that we want to buy, and the deadlines for offers and settlement. We 
would accept offers on a multiple-price basis--that is, we would 
determine and accept the most attractive offers and each successful 
offeror would receive the price at which it offered securities. We 
could decide to buy back less than the announced amount if market 
conditions warranted.
    For the reasons set forth below, we propose that the entities that 
have a trading relationship with the Federal Reserve Bank of New York 
(primary dealers) be eligible to submit offers. Other entities could 
submit offers through the primary dealers or an intermediary that has a 
relationship with a primary dealer.
    Restricting direct offers to primary dealers would permit us to use 
the

[[Page 42627]]

Federal Reserve Bank of New York's existing electronic systems for 
executing open market transactions and facilitate transfers of 
securities to Treasury at settlement. No customer lists would be 
required under these proposed rules.
    Redemption operation announcements would be in the form of an 
official Treasury press release, supplemented by a posting on the 
Bureau of the Public Debt's website (www.publicdebt.treas.gov) and on-
line broadcast messages over the Federal Reserve's Fedline OM (Open 
Market) system. The Treasury securities eligible for redemption and the 
privately held amount of each security would be included in the 
redemption operation announcement.
    To expedite tender processing and calculation and announcement of 
redemption operation results, we would accept competitive offers only. 
Price-based offers would be most convenient for redemption operation 
participants since the eligible securities already would be trading in 
the secondary market on a price basis.
    The price format would be consistent with that already used by the 
Federal Reserve's open market operations. See Sec. 375.13(b). The only 
limitation on the dollar amount of offers is that the total amount of 
offers from a submitter for any particular security could not exceed 
the total outstanding privately held amount of that security.
    Calculation of redemption operation results would occur at the 
Federal Reserve Bank of New York, acting as Treasury's fiscal agent, 
using a methodology determined by Treasury. There would be no 
limitation on the number of offers for each security. We also would not 
limit the aggregate amount of offers for securities that Treasury would 
accept from any one submitter.2
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    \2\ In other words, there is no limitation similar to the ``35-
percent limit'' on awards in the auction process. See 31 CFR 
356.22(b).
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    It is possible that, in a particular redemption operation, the 
calculations could result in our redeeming only one security. We also 
would not set any limits on the amount or percentage of the outstanding 
amount of a security that could be redeemed. It is possible, therefore, 
that following a redemption operation or redemption operations, the 
privately held amount still outstanding of a particular security could 
be very small.
    Once the redemption operation calculations have been completed, 
Treasury would announce the results through an official press release, 
including a listing of the amount of each security we accept for 
redemption. We would also post the results to Public Debt's website and 
other on-line broadcast messages. The Federal Reserve Bank of New York 
would transmit results messages to the submitters who participated in 
the redemption operation. A results message would inform a submitter 
only of the acceptance or rejection of the offers it submitted. 
Submitters would in turn notify customers of successful offers in the 
redemption operation.
    Settlement would occur on the business day after the deadline for 
submission of offers (tenders). Successful submitters would transfer 
the securities they submitted offers for in the redemption operation to 
Treasury, via the Federal Reserve Bank of New York. This next-day 
delivery requirement follows current market convention for other 
Treasury securities transactions. The settlement amount would include 
any accrued interest payable by Treasury through the settlement date. 
We request specific comment on this proposed requirement or any other 
settlement-related issues.
    The securities delivered may be in either book-entry (electronic) 
or definitive (paper) form. Those delivering book-entry securities 
would transfer via Fedwire the correct par amount of securities against 
payment for the correct settlement amount to the account specified on 
the redemption operation announcement. A submitter planning to deliver 
definitive securities would be required to contact the Federal Reserve 
Bank of New York within two hours of the announcement of the redemption 
operation results and make arrangements for delivery.
    We encourage comments on any aspect of this proposed rule to ensure 
that we address the concerns of market participants and Treasury. In 
addition, this proposed rule has been drafted using plain language. We 
specifically request comment on the clarity of this rule and how we can 
make it easier to understand.

III. Procedural Requirements

    This proposed rule is not a ``significant regulatory action'' under 
Executive Order 12866. Although we are issuing this proposed rule in 
proposed form to benefit from public comment, the notice and public 
procedures requirements of the Administrative Procedure Act do not 
apply, under 5 U.S.C. 553(a)(2).
    Since no notice of proposed rulemaking is required, the provisions 
of the Regulatory Flexibility Act (5 U.S.C. 601 et seq.) do not apply.

List of Subjects in 31 CFR Part 375

    Bonds, Federal Reserve System, Government securities, Securities.

    For the reasons stated in the preamble, the Treasury proposes to 
amend 31 CFR chapter II, subchapter B, by adding new part 375 to read 
as follows:

PART 375--MARKETABLE TREASURY SECURITIES REDEMPTION OPERATIONS

Subpart A--General Information

Sec.
375.0  What authority does the Treasury have to redeem its 
securities?
375.1  Where are the rules for the redemption operation located?
375.2  What special definitions apply to this rule?
375.3  What is the role of the Federal Reserve Bank of New York in 
this process?

Subpart B--Offering, Certifications, and Delivery

375.10  What is the purpose of the redemption operation 
announcement?
375.11  Who may participate in a redemption operation?
375.12  How do I submit an offer?
375.13  What requirements apply to offers?
375.14  Do I have to make any certifications?
375.15  Who is responsible for delivering securities?

Subpart C--Determination of Redemption Operation Results; Settlement

375.20  When will the Treasury decide on which offers to accept?
375.21  When and how will the Treasury announce the redemption 
operation results?
375.22  Will I receive any additional information and, if I am 
submitting offers for others, do I have to provide confirmations?
375.23  How does the securities delivery process work?

Subpart D--Miscellaneous Provisions

375.30  Does the Treasury have any discretion in this process?
375.31  What could happen if someone does not fully comply with the 
redemption operation rules or fails to deliver securities?

    Authority: 5 U.S.C. 301; 31 U.S.C. 3111; 12 U.S.C. 391.

Subpart A--General Information


Sec. 375.0  What authority does the Treasury have to redeem its 
securities?

    Section 3111 of Title 31 of the United States Code authorizes the 
Secretary of the Treasury to use money received from the sale of an 
obligation and other money in the general fund of the Treasury to buy, 
redeem, or refund, at or before maturity, outstanding bonds, notes, 
certificates of indebtedness, Treasury bills, or savings certificates 
of

[[Page 42628]]

the United States Government. For the purposes of this part, we will 
refer to these outstanding obligations as ``securities.''


Sec. 375.1  Where are the rules for the redemption operation located?

    The provisions in this part and the redemption operation 
announcement govern the redemption of marketable Treasury securities 
under 31 U.S.C. 3111. (See Sec. 375.10.)


Sec. 375.2  What special definitions apply to this rule?

    The definitions in 31 CFR part 356 govern this part except as 
follows:
    Accrued interest means an amount payable by the Treasury as part of 
the settlement amount for the interest income earned between the last 
interest payment date and the settlement date.
    Bank means the Federal Reserve Bank of New York.
    Customer means a person or entity on whose behalf a submitter has 
been directed to submit an offer of a specified amount of securities in 
a specific redemption operation.
    Definitive security means a security that is issued and maintained 
as a certificate. Definitive securities are in either registered or 
bearer form.
    Minimum offer amount means the smallest par amount of a security 
that may be offered to the Treasury. We will state the minimum offer 
amount in the redemption operation announcement.
    Multiple means the smallest additional par amount of a security 
that may be offered to the Treasury. We will state the multiple in the 
redemption operation announcement.
    Offer means an offer to deliver for redemption a stated par amount 
of a specific security to the Treasury at a stated price.
    Price means the price of a security as offered by a submitter or 
its customer and excludes accrued interest.
    Privately held amount means the total amount outstanding of a 
security eligible for redemption less holdings of the Federal Reserve 
System and Federal Government accounts.
    Redemption amount means the maximum par amount of securities that 
we are planning to redeem through a redemption operation. We will state 
the redemption amount in the redemption operation announcement.
    Redemption operation means a competitive process by which the 
Treasury accepts offers of marketable Treasury securities that by their 
terms are not immediately payable.
    Security means an outstanding unmatured obligation of the United 
States Government that the Secretary is authorized to buy, redeem or 
refund under section 3111 of Title 31 of the United States Code.
    Settlement means full and complete delivery of and payment for 
securities redeemed.
    Settlement amount means the par amount of each security that we 
redeem, multiplied by the price we accept in a redemption operation, 
plus any accrued interest.
    Settlement date means the date specified in the redemption 
operation announcement on which you must deliver a security to the 
Treasury for payment.
    Submitter means an entity submitting offers directly to the 
Treasury for its own account, for the account of others, or both. (See 
Sec. 375.11(a).)
    Tender means a computer transmission or document submitted in a 
redemption operation that contains one or more offers.
    We (``us'') means the Secretary of the Treasury and his or her 
delegates, including the Treasury Department, Bureau of the Public 
Debt, and their representatives. The term also includes the Federal 
Reserve Bank of New York, acting as fiscal agent of the United States.
    You means a prospective submitter in a redemption operation.


Sec. 375.3  What is the role of the Federal Reserve Bank of New York in 
this process?

    As fiscal agent of the United States, the Federal Reserve Bank of 
New York performs various activities necessary to conduct a redemption 
operation under this part. These activities include but are not limited 
to:
    (a) Accepting and reviewing tenders;
    (b) Calculating redemption operation results;
    (c) Issuing notices of redemptions;
    (d) Accepting deliveries of Treasury securities at settlement; and
    (e) Processing the Treasury payment for securities delivered at 
settlement.

Subpart B--Offering, Certifications, and Delivery


Sec. 375.10  What is the purpose of the redemption operation 
announcement?

    We provide public notice that we are redeeming Treasury securities 
by issuing a redemption operation announcement. This announcement lists 
the details of each proposed redemption operation, including the total 
redemption amount, the eligible securities, the total privately held 
amount of each eligible security, and the redemption operation and 
settlement dates. The redemption operation announcement and this part 
specify the terms and conditions of a redemption operation. If anything 
in the redemption operation announcement differs from anything in this 
part, the redemption operation announcement will apply. Accordingly, 
you should read the applicable redemption operation announcement along 
with this part.


Sec. 375.11  Who may participate in a redemption operation?

    (a) Submitters. To be a submitter, you must be an institution that 
the Federal Reserve Bank of New York has approved to conduct open 
market transactions with the Bank.
    (b) Others. A person or entity other than a submitter may 
participate only if it arranges to have an offer or offers submitted on 
its behalf by a submitter.


Sec. 375.12  How do I submit an offer?

    As a submitter, you must submit an offer in a tender to the 
Treasury via the Federal Reserve Bank of New York through its Trading 
Room Automated Processing System (TRAPS). You must submit any tenders 
in an approved format and the Bank must receive them prior to the 
closing time in the redemption operation announcement. If we do not 
receive your tenders timely, we will reject them. Tenders are binding 
on their submitter after the closing time specified in the redemption 
operation announcement. You are responsible for ensuring that the 
Federal Reserve Bank of New York receives your tenders on time. We will 
not be responsible in any way for any unauthorized tender submissions 
or for any delays, errors, or omissions in submitting tenders.


Sec. 375.13  What requirements apply to offers?

    (a) General. You may only submit competitive offers (specifying a 
price). All offers must state the CUSIP number or security description, 
par amount, and price of each security offered. All offers must equal 
or exceed the minimum offer amount, and be in the multiple, stated in 
the redemption operation announcement.
    (b) Price format. You must express offered prices in terms of price 
per $100 of par with three decimals, e.g., 102.172. The first two 
decimals represent fractional 32nds of a dollar. The third decimal 
represents eighths of a 32nd of a dollar, and must be a 0, 2, 4, or 6. 
For example, an offer of 102.172 means one hundred two and seventeen 
32nds and two eighths of a 32nd, or in decimals, 102.5390625.
    (c) Maximum amount offered. The total amount of your offers for any 
individual security may not exceed the total privately held amount of 
the

[[Page 42629]]

security. If it does, we will recognize only your lowest-priced offer, 
through successively higher-priced offers, until we reach the total 
privately held amount. A list of the privately held amount of each 
eligible security will appear in the redemption operation announcement.
    (d) Maximum number of offers. There is no limit on the number of 
offers you may make of each eligible security. There is also no limit 
on the number of eligible securities you may offer.


Sec. 375.14  Do I have to make any certifications?

    By submitting a tender offering a security or securities for sale, 
you certify that you are in compliance with this part and the 
redemption operation announcement.


Sec. 375.15  Who is responsible for delivering securities?

    As a submitter, you are responsible for delivering any securities 
we accept in the redemption operation. (See Sec. 375.23.) All 
securities you deliver must be free and clear of all liens, charges, 
claims, and any other restrictions.

Subpart C--Determination of Redemption Operation Results; 
Settlement


Sec. 375.20  When will the Treasury decide on which offers to accept?

    We will determine which offers or portions of offers to accept 
after the closing time for receipt of tenders. All such determinations 
will be final.


Sec. 375.21  When and how will the Treasury announce the redemption 
operation results?

    We will make an official announcement of the redemption operation 
results through a press release. For each security we redeem, the press 
release will include such information as the amounts offered and 
accepted, the highest price accepted, and the remaining privately held 
amount outstanding.


Sec. 375.22  Will I receive any additional information and, if I am 
submitting offers for others, do I have to provide confirmations?

    (a) Confirmations to submitters. We will provide a confirmation of 
acceptance or rejection in the form of a results message to submitters 
of offers by the close of the business day of the redemption operation.
    (b) Confirmation of customer offers. If you submit a successful 
offer for a customer, you are responsible for notifying that customer 
of the impending redemption.


Sec. 375.23  How does the securities delivery process work?

    (a) Deliveries of book-entry securities. If any of the offers you 
submitted are accepted and you are delivering book-entry securities, 
you must transfer them in the correct par amount against the correct 
settlement amount on the settlement date. You must deliver the 
securities to the account specified in the redemption operation 
announcement.
    (b) Deliveries of definitive securities. If any of the offers you 
submitted are accepted and you are delivering definitive securities, 
you must notify the Federal Reserve Bank of New York within two hours 
of the announcement of the redemption operation results. You must 
deliver them in the correct par amount on the settlement date. 
Registered securities must be properly assigned. Unless otherwise 
specified in the offering announcement, bearer securities must have all 
of their unmatured coupons attached. Deliver them to us at the address 
for the Federal Reserve Bank of New York provided in the redemption 
operation announcement. On the day the Bank receives them, it will 
credit the settlement amount to the depository institution's funds 
account you specified when you notified the Bank of your intention to 
deliver definitive securities.

Subpart D--Miscellaneous Provisions


Sec. 375.30  Does the Treasury have any discretion in this process?

    (a) We have the discretion to:
    (1) Accept or reject any offers or tenders submitted in a 
redemption operation;
    (2) Redeem less than the amount of securities specified in the 
redemption operation announcement;
    (3) Add to, change, or waive any provision of this part; or
    (4) Change the terms and conditions of a redemption operation.
    (b) Our decisions under this part are final. We will provide a 
public notice if we change any redemption operation provisions, terms 
or conditions.


Sec. 375.31  What could happen if someone does not fully comply with 
the redemption operation rules or fails to deliver securities?

    (a) General. If a person or entity fails to comply with any of the 
redemption operation rules in this part, we will consider the 
circumstances and take appropriate action. This could include barring 
the person or entity from participating in future redemption operations 
under this part and future auctions under 31 CFR part 356. We also may 
refer the matter to an appropriate regulatory agency.
    (b) Liquidated damages. If you fail to deliver securities on time, 
we may require you to pay liquidated damages of up to 1% of your 
settlement amount.

    Dated: July 29, 1999.
Donald V. Hammond,
Fiscal Assistant Secretary.
[FR Doc. 99-19957 Filed 8-4-99; 8:45 am]
BILLING CODE 4810-39-P