[Federal Register Volume 65, Number 12 (Wednesday, January 19, 2000)]
[Rules and Regulations]
[Pages 3114-3118]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-1250]



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Part VII





Department of the Treasury





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Fiscal Service



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31 CFR Part 375



Marketable Treasury Securities Redemption Operations; Final Rule

  FederalRegister / Vol. 65, No. 12 / Wednesday, January 19, 2000 / 
Rules and Regulations  

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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:  Final rule.

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SUMMARY:  The Department of the Treasury (``Treasury,'' ``We,'' or 
``Us'') is issuing rules in final form setting out the terms and 
conditions by which we may redeem outstanding, unmatured marketable 
Treasury securities. We are establishing a new part in the Code of 
Federal Regulations for this purpose. Redemption operations 
(``buybacks'') will help us better manage our financing needs, promote 
more efficient capital markets, and may lower financing costs for 
taxpayers.

EFFECTIVE DATE:  January 19, 2000.

ADDRESSES:  You may download this final rule from the Bureau of the 
Public Debt's Internet site at the following address: 
www.publicdebt.treas.gov. It is also available for public inspection 
and copying at the Treasury Department Library, Room 5030, Main 
Treasury Building, 1500 Pennsylvania Avenue, N.W., Washington, D.C. 
20220. To visit the library, call (202) 622-0990 for an appointment.

FOR FURTHER INFORMATION CONTACT:  Lori Santamorena (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 market borrowing across all 
maturity areas. In this environment, we began examining the concept of 
purchasing outstanding Treasury securities in the market.
    Buybacks will provide us with greater flexibility to manage the 
government's debt and to respond to our improved fiscal condition. 
First, buybacks will enhance market liquidity by allowing us to 
maintain regular issuances of new benchmark securities across the 
maturity spectrum, in greater volume than would otherwise be possible. 
Over the long term, this enhanced liquidity could reduce the 
government's interest expense and promote more efficient capital 
markets.
    Second, buybacks will enhance our ability to exert greater control 
over the maturity structure of the outstanding debt. Without a buyback 
program, further reductions in Treasury new issue sizes and frequencies 
could be necessary. A buyback program, however, will provide us the 
option of managing the maturity structure of the debt by selectively 
targeting the maturities of debt to be repurchased.
    Third, buybacks will provide an additional cash management tool, 
absorbing excess cash in periods when tax revenues usually exceed 
immediate spending needs.
    In addition, although not a primary reason for conducting buybacks, 
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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    On August 5, 1999 (64 FR 42626), we published proposed rules for 
public comment that laid out the proposed terms and conditions by which 
we would conduct buybacks. The closing date for comments was October 4, 
1999. As explained in more detail below, after considering the comments 
provided, we have decided to adopt the proposed methodology for 
conducting buybacks.

II. Comments Received in Response to the Proposed Rule

    We received 13 comment letters on the proposed rule \2\--five from 
securities firms, four from individuals, and one each from a major 
trade association, the Treasury advisory committee of a major trade 
association, a futures exchange, and a Federal Reserve Bank. Overall 
these commenters were supportive of the proposal. No commenters opposed 
the proposal. As explained below, the comments raised a series of 
policy or technical issues related to implementation.
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    \2\ The comment letters are available for downloading on the 
Internet and for inspection and copying at the Treasury Department 
Library at the addresses provided earlier in this rule.
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A. Debt Management Policy Issues

    Two commenters expressed concern that the budget accounting 
treatment of any premiums that Treasury would pay to buy back Treasury 
securities could limit the size of the buyback program. Both commenters 
suggested a budget accounting policy change--that these premiums be 
amortized over the remaining life of the security bought back.
    We consider this issue to be outside the scope of these 
regulations, which set out the terms and conditions of redemption 
operations.
    Several comment letters made recommendations on the scheduling of 
redemption operations. Two commenters wanted them to be held in 
conjunction with the regular Treasury quarterly refunding auctions in 
February, May, August, and November. Another commenter recommended that 
redemption operations be held close to auctions of Treasury securities 
of similar maturity, while another commenter suggested only a regular 
schedule of redemption operations. Two commenters preferred that 
redemption operations not be conducted near potential delivery dates 
for Treasury futures contracts.
    Commenters recommended a variety of maturity ranges to buy back. 
For example, one commenter advocated that securities with 15 to 25 
years remaining to maturity were the best candidates for the Treasury 
to purchase, while another commenter recommended that Treasury buy back 
debt within the two-year to five-year maturity range to minimize any 
effects on the average length of the debt outstanding. Another 
commenter suggested that Treasury avoid buying back those securities 
that are the ``cheapest-to-deliver'' for Treasury futures contracts.
    Two commenters expressed concern about the effect that redemption 
operations may have on the remaining liquidity of off-the-run issues. 
Both suggested limiting redemption operations for a particular security 
to 10 percent of its outstanding amount. One of these commenters also 
suggested that at least $1 billion of a security always remain 
outstanding. On the other hand, one commenter advocated that ``issues 
with less than $2 billion outstanding should be removed from the 
market,'' while another commenter saw ``no reason to state a limit on 
the specific amount of any given security that the Treasury can 
purchase.''
    The issues of the scheduling of redemption operations, the 
maturities to redeem, and the remaining supply of securities redeemed 
are not addressed in the final rule. For each operation we will first 
announce when the operation will occur and which maturity sector or 
sectors will be eligible for redemption. We will determine the amount 
of any particular security to redeem during the

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redemption operation consistent with our debt management goals.

B. Technical/Operational Issues

    Two commenters recommended that we issue redemption operation 
announcements several days in advance of the redemption operations. 
They contended that a relatively long notice period would give 
securities dealers more time to prepare for the redemption operation, 
to canvass their customers to determine their levels of interest, and 
that it would aid price discovery. One commenter, however, preferred 
``a relatively short lead time * * * , not unlike the process for a 
Federal Reserve coupon pass.''
    We are not addressing the notice period in the final rule so that 
we can retain flexibility in the timing of announcements.
    Opinion was fairly evenly divided on the issue of whether Treasury 
should announce the specific securities that are eligible for 
redemption or merely announce a particular range of maturities that 
will be purchased. Those who favored announcing specific issues 
primarily argued that this would help dealers add eligible securities 
to their inventories prior to the redemption operation. Commenters 
preferring announcing a range of securities contended that participants 
would have greater flexibility to decide which securities to offer, and 
Treasury would have greater flexibility to decide which securities to 
purchase. One commenter also predicted that announcing a maturity range 
would mitigate the ``announcement effect'' of the prices of specific 
issues increasing as a direct result of the announcement.
    The announcement will provide the maturity sector or sectors that 
will be eligible for redemption. It will also provide descriptions of 
each security within those maturity sectors including the CUSIP number, 
interest rate, maturity date, and the amount outstanding.
    One commenter recommended that we use a proprietary electronic 
system for processing offers different from the Federal Reserve Bank of 
New York's. We will use the Federal Reserve Bank of New York's system, 
however, because it is already in place at the location where offers 
will be received and it meets our processing needs.
    Another commenter suggested that Treasury consider using a single-
price rather than a multiple-price auction mechanism. This commenter 
suggested that submitters may make more aggressive offers in a single-
price format.
    Redemption operations will at least initially be a multiple-price 
process in which successful offerors will receive the price at which 
they offered securities. Multiple-price redemption operations will 
allow us to make immediate use of the Federal Reserve Bank of New 
York's electronic system for executing open market operations. At some 
future time, however, we might want to evaluate the potential merits of 
a single-price process.
    One commenter noted that the proposed rule was silent on the length 
of time between the closing time for submission of offers and the time 
that confirmations will be provided to submitters. The commenter 
stressed that this time period should be as short as possible because 
of the submitting dealers' exposure to market risk during this 
timeframe.
    We will provide confirmations (results messages) to submitters, and 
issue a redemption operation results press release, as quickly as 
possible following the deadline for submitting offers.
    In the preamble to the proposed rule, we indicated that settlement 
would occur on the day after the redemption operation in conformance 
with the market's next-day settlement convention for other Treasury 
securities transactions. We specifically requested comment, however, on 
settlement-related issues. Two commenters recommended that there be at 
least two days between a redemption operation and settlement, primarily 
to inform any customers that their offers had been accepted and to 
facilitate timely delivery of customer securities. Another commenter 
specifically urged a three-day settlement timeframe because that is the 
settlement standard for corporate debt.
    We will initially provide a minimum of two days between a 
redemption operation and settlement. This timeframe, however, is not 
stated in the final rule. Rather, the redemption operation and 
settlement dates will be provided in the redemption operation 
announcement.
    We also received a comment that the definition of ``accrued 
interest'' should be revised to clarify that the time period covered in 
the accrued interest calculation includes the settlement date. We agree 
with this recommendation.
    One comment letter expressed confusion over whether participation 
in redemption operations would be voluntary and concern that the 
Treasury might purchase, or a securities dealer might offer to sell, a 
Treasury security without the permission of its owner.
    In response, we want to emphasize that participation in a Treasury 
redemption operation will be entirely voluntary and that securities 
industry rules for dealing fairly with customers prohibit securities 
dealers from conducting unauthorized customer transactions.
    Finally, one comment letter consisted of a series of questions 
regarding various aspects of the redemption program, but made no 
recommendations.

III. Changes From the Proposed Rule

    After taking the comments we received into consideration, we are 
adopting this final rule setting out the terms and conditions by which 
we may redeem outstanding, unmatured marketable Treasury securities. 
The final rule adopts the proposed rule without significant changes. 
The only changes that have been made are in the definitions of 
``Accrued interest,'' ``Price,'' and ``Privately held amount'' 
(Sec. 375.2), and in the descriptions of the redemption operation 
announcement (Sec. 375.10), how to submit an offer (Sec. 375.12), and 
who is responsible for delivering securities (Sec. 375.15).
    The description of the redemption operation announcement was 
revised to add the range of maturities of eligible securities as one of 
the details that we will provide.
    The description of how to submit an offer was revised to provide us 
greater flexibility in which electronic system we will use for 
receiving offers. The proposed rule specified the Federal Reserve Bank 
of New York's Trading Room Automated Processing System (TRAPS) as the 
system through which submitters must submit offers. While TRAPS is the 
system through which submitters will submit offers, eliminating 
specific mention of this system in the final rule allows for a 
different system to be used at some future date.
    The description of who is responsible for delivering securities was 
revised to clarify that submitters are responsible for delivering all 
securities we accept in a redemption operation, including any 
securities for which they submitted offers on behalf of others.
    In addition, we eliminated the paragraphs on the maximum amount 
offered (Sec. 375.13) and deliveries of definitive securities 
(Sec. 375.23). We removed the limit on the maximum amount of a 
particular security that a submitter may offer because it is not 
necessary operationally. The Federal Reserve Bank of New York's 
electronic system will accept the correct amount of an offer, even if 
the offer exceeds the security's amount outstanding.

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    We eliminated the paragraph that would have permitted deliveries of 
definitive securities because developing a process for timely 
definitive deliveries would have been too complex operationally in 
relation to any participation we might expect from holders of 
definitive securities. Relatively few Treasury securities continue to 
be held in definitive form. Those still holding definitive securities 
can easily convert them to book-entry securities if they wish to 
participate in any future redemption operations.
    A summary of the main features of the final rule that remain 
unchanged from the proposed rule are:
    (1) We will issue an announcement of an upcoming redemption 
operation, including the expected maximum amount of the operation;
    (2) Offers will be competitive, on the basis of price, to three 
decimals;
    (3) Redemption operations will be a multiple-price process in which 
successful offerors receive the price at which they offered securities;
    (4) Only primary dealers as designated by the Federal Reserve Bank 
of New York will be allowed to submit offers for themselves or others, 
enabling use of the Bank's existing electronic systems; and
    (5) There will be no limits on the number of offers per security or 
on the total number of offers from a particular submitter.

IV. Procedural Requirements

    This final rule is not a ``significant regulatory action'' under 
Executive Order 12866. Although we issued this rule in proposed form to 
benefit from public comment, the notice and public procedures and 
delayed effective date requirements of the Administrative Procedure Act 
do not apply, under 5 U.S.C. 553(a)(2).
    Since no notice of proposed rulemaking was 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, part 375 is added to 31 CFR 
chapter II 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 confirmations 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 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 up to and including 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.
    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 dollar amount to be paid for a security expressed 
as a percent of its current par amount.
    Privately held amount means the total amount outstanding of a 
security 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.

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    We (``us'') means the Secretary of the Treasury and his or her 
delegates, including the Treasury Department, the 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 may 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 
maximum redemption amount, the range of maturities of eligible 
securities, descriptions of the securities that fall within that 
maturity range, 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. You must submit any 
tenders in an approved format and the Bank must receive them prior to 
the closing time stated in the redemption operation announcement. If we 
do not receive your tenders timely, we will reject them. Your tenders 
are binding on you after the closing time specified in the redemption 
operation announcement. You are responsible for ensuring that we 
receive 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 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 number of offers. There is no limit on the number of 
offers you may make for 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, including any securities for 
which you submitted offers on behalf of others. (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 confirmations 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?

    If any of the offers you submitted are accepted, you must transfer 
the correct book-entry Treasury securities 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.

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 provision, term or 
condition.

[[Page 3118]]

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 what we deem to be 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 
projected settlement amount.

    Dated: January 13, 2000.
Donald V. Hammond,
Fiscal Assistant Secretary.
[FR Doc. 00-1250 Filed 1-18-00; 8:45 am]
BILLING CODE 4810-39-U