[Federal Register Volume 66, Number 143 (Wednesday, July 25, 2001)]
[Proposed Rules]
[Pages 38600-38602]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-18441]


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DEPARTMENT OF THE TREASURY

Fiscal Service

31 CFR Part 356

[Department of the Treasury Circular, Public Debt Series No. 1-93]


Sale and Issue of Marketable Book-Entry Treasury Bills, Notes, 
and Bonds; Calculation of Net Long Position and 35 Percent Limit

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

ACTION: Advance notice of proposed rulemaking.

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SUMMARY: The Department of the Treasury (``Treasury,'' ``We,'' or 
``Us'') is issuing this Advance Notice of Proposed Rulemaking to 
solicit comments on potential modifications to the calculation of the 
net long position (``NLP'') and the 35 percent award limit in 
marketable Treasury securities auctions. The purpose of any such 
modifications would be to ensure that participation in Treasury 
auctions remains both strong and broad, particularly in ``reopenings,'' 
which are auctions of additional amounts of previously issued Treasury 
securities. Treasury is examining whether the current method for 
calculating the NLP unnecessarily limits or precludes participation in 
reopenings by auction participants that already hold significant 
amounts of the security we are auctioning. We are specifically 
interested in comments on an alternative that would permit bidders in 
reopenings to exclude a certain portion of their current holdings of 
the security being auctioned from their NLP calculation. We also 
discuss other alternatives for calculating the NLP and the 35 percent 
award limit. We invite comments on these alternatives as well.

DATES: Submit comments on or before September 10, 2001.

ADDRESSES: You may send hard copy comments to: Government Securities 
Regulations Staff, Bureau of the Public Debt, 999 E Street NW., Room 
315, Washington, DC 20239. 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. You 
may download this advance notice, and review the comments we receive, 
from the Bureau of the Public Debt's website at 
www.publicdebt.treas.gov. The advance notice and comments will also be 
available for public inspection and copying at the Treasury Department 
Library, Room 1428, Main Treasury Building, 1500 Pennsylvania Avenue, 
NW., Washington, DC 20220. To visit the library, call (202) 622-0990 
for an appointment.

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

SUPPLEMENTARY INFORMATION: The Uniform Offering Circular, in 
conjunction with the offering announcement for each auction, provides 
the terms and conditions for the sale and issuance in an auction to the 
public of marketable Treasury bills, notes and bonds.\1\ One of these 
terms (rules) is the limit on the award to any one bidder of 35 percent 
of the offering amount. In this notice, we first describe this rule and 
its rationale, and why we are considering a change. Second, we give 
historical background. Third, we describe various alternatives on which 
we are seeking comment.
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    \1\ The Uniform Offering Circular was published as a final rule 
on January 5, 1993 (58 FR 412). The circular, as amended, is 
codified at 31 CFR part 356.
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I. The 35 Percent Limit and its Rationale

    The 35 percent rule generally limits auction awards for any one 
competitive bidder to 35 percent of the total amount offered to the 
public in a particular auction.\2\ This rule ensures that awards in our 
auctions are distributed to a number of auction participants, rather 
than to just one or two. This principle of broad distribution is 
intended to encourage participation by a significant number of 
competitive bidders in each auction. Broad participation keeps our 
borrowing costs to a minimum, helps ensure that Treasury auctions are 
fair and competitive, and makes it less likely that ownership of 
Treasury securities will become overly concentrated.
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    \2\ 31 CFR 356.22(b).
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    A key component of the 35 percent award limit is the net long 
position calculation.\3\ If a bidder has a reportable NLP, we subtract 
it from the 35 percent award limit in determining the bidder's maximum 
award amount for the auction.
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    \3\ 31 CFR 356.13.
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    The net long position is generally the amount of the security being 
auctioned that a bidder has obtained, or has arranged to obtain, 
outside of the auction in the secondary market. The term ``net long'' 
refers to the extent to which an investor has bought (or has agreed to 
buy) more of a security than it has sold (or has agreed to sell). The 
specific components of the NLP are intended to capture the various ways 
that a bidder can acquire a Treasury security. As defined in 
Sec. 356.13(b), these components are the par amount of:
    (1) Holdings of outstanding securities with the same CUSIP \4\ 
number as the security being auctioned;
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    \4\ Committee on Uniform Securities Identification Procedures. 
The CUSIP number is the unique identifying number assigned to each 
separate security issue and each separate STRIPS component.
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    (2) Positions, in the security being auctioned, in
    (i) When-issued trading,\5\
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    \5\ When-issued trading refers to trading in a security that 
occurs prior to its issuance. Payment and delivery for this trading 
activity occurs on the day we issue the securities, thus the term 
``when-issued.'' In the Treasury securities market, when-issued 
trading can begin as soon as we publicly announce the upcoming 
auction. When-issued trading aids the distribution process for 
Treasury securities. Most importantly for the auction process, when-
issued trading serves as a price-discovery mechanism for competitive 
bidders.
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    (ii) Futures contracts that require delivery of the specific 
security being auctioned (but not futures contracts for which the 
security being auctioned is one of several securities that may be 
delivered, and not futures contracts that are cash-settled), and
    (iii) Forward contracts (including next-day settling); and
    (3) Holdings of STRIPS \6\ principal components of the security 
being auctioned, including when-issued trading positions of such 
principal components.
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    \6\ Separate Trading of Registered Interest and Principal of 
Securities.
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    A competitive bidder is required to report its NLP if the sum of 
its bids plus its NLP equals or exceeds the NLP reporting threshold, 
currently $2 billion for Treasury notes and bonds and $1 billion for 
Treasury bills (unless otherwise stated in the offering 
announcement).\7\ If a bidder's total bids

[[Page 38601]]

exceed the reporting threshold but the bidder either has no position or 
has a net short position, it must report an NLP of zero.
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    \7\ 31 CFR 356.10.
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    The application of the NLP reporting requirement and the 35 percent 
award limit in reopenings has caused us to re-examine the way the NLP 
is calculated. In a reopening, we apply the 35 percent limit to the 
public offering amount of that specific auction. Because a bidder must 
include any holdings of the security being auctioned in its NLP 
calculation, it may be awarded less in a reopening than it would if it 
had no such holdings. The bidder's award may be reduced--or it may 
receive no award--even though the bidder's portion of the total amount 
outstanding of the security may be under 35 percent once we issue the 
additional reopening amount.
    For example, assume a bidder owns $3.5 billion of a Treasury 
security that has $10 billion outstanding, and the bidder has no other 
positions in that security. If we were to reopen the security by 
offering an additional $10 billion to the public, that bidder would not 
be awarded any additional securities because its NLP of $3.5 billion 
would already equal the 35 percent limit ($10 billion  x  .35). 
However, after we issued the additional $10 billion, the bidder would 
hold only 17.5 percent of the total combined amount outstanding ($3.5 
billion/$20 billion).
    Reopenings are now more frequent because in February 2000 we 
adopted a policy of regular reopenings to preserve the liquidity of our 
longer-term securities as our borrowing needs have declined.\8\ In 
addition, we announced today that we will begin four-week bill auctions 
the week of July 30. These auctions will be reopenings of previously 
issued Treasury bills. Along with the publication of this notice, 
Treasury is issuing a press release that describes the net long 
position reporting requirements and the application of the 35 percent 
award limit for Treasury four-week bill auctions while we consider 
whether to modify the rule.
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    \8\ Treasury Press Release dated February 2, 2000.
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    Since Treasury announced its policy of more frequent reopenings, 
several auction participants have asserted that the likelihood of their 
being precluded from participating in a future reopening has increased 
because of the requirement to include current holdings of the security 
being auctioned in the NLP calculation. The Treasury Borrowing Advisory 
Committee of The Bond Market Association addressed this issue in May 
2001. The Committee recommended that the auction rules be modified so 
that ``the net long position used in the calculation of a bidder's 
position refers only to the position in the when-issued security.'' \9\ 
Regarding the 35 percent award limit itself, a majority of the 
Committee felt there was a need for some threshold limit but was 
unprepared to state what that limit might be.
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    \9\ Report to the Secretary of the Treasury from the Treasury 
Borrowing Advisory Committee of The Bond Market Association (dated 
May 1, 2001). The Committee, which is comprised of securities 
industry representatives, provides periodic advice to Treasury on 
debt management issues.
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    The development of more frequent reopenings and declining borrowing 
needs make this an opportune time to re-examine the application of the 
NLP and the 35 percent limit. Our goal is to strike a better balance 
between fostering broad participation in Treasury auctions while still 
limiting the potential for concentration of ownership.

II. Historical Background

    Application of the 35 percent award limit and the NLP reporting 
requirement has evolved over the years. The initial limitation, 
introduced in August 1962, was 25 percent of the auction offering 
amount. In May 1979, the 25 percent award limit was modified to apply 
to the ``public'' offering amount instead of the total offering amount. 
This modification excluded from the 25 percent calculation those 
Treasury securities allotted to the Federal Reserve in exchange for 
maturing securities held both for its own account and for the accounts 
of foreign official institutions. It also excluded Treasury securities 
allotted to the Federal Reserve for new cash tenders \10\ on behalf of 
foreign official institutions. One consequence of this rule 
modification was that it reduced the possible award size for 
competitive bidders.
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    \10\ New cash tenders are bids from foreign official 
institutions for amounts in excess of amounts of maturing Treasury 
securities that they hold.
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    In September 1981, Treasury increased the maximum award in 
marketable Treasury securities auctions from 25 percent to 35 percent 
of the public offering amount. The ceiling was raised to lessen the 
effect of the 1979 modification that limited the 25 percent rule to the 
public offering amount instead of the total offering amount.
    In July 1990, the 35 percent limit was extended to bids as well as 
awards, limiting the maximum bid that we would recognize at any one 
yield to 35 percent of the public offering amount.
    Although some changes have been made to NLP reporting and the 
``public offering amount'' to which the 35 percent limit is applied, 
the basic 35 percent rule has remained unchanged since 1990. We note 
that after the Uniform Offering Circular was published in proposed form 
on January 31, 1992 (57 FR 3870), several commenters questioned the 
requirement that, in a reopening, a bidder include its holdings of the 
outstanding security in its NLP calculation. At that time, we retained 
the provision because, ``[i]f the holdings of the issue being reopened 
were to be excluded from the net long position computation, a holder of 
a large outstanding amount could receive an auction award that, when 
combined with its net long position, would highly concentrate the 
holdings of the security as a result of the reopening. Similarly, if 
the 35% were to be applied to the combined auction amounts, holders of 
relatively small amounts of outstanding securities would be in a 
position to receive significantly more than 35% of the additional 
offering.'' \11\
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    \11\ 57 FR 45117 (September 30, 1992).
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III. Alternatives

    We are considering a number of alternatives to reach our goal of 
fostering broad participation in Treasury auctions while limiting the 
potential for concentration of ownership. As a result of our 
considerations to this point, we feel currently that Alternative 1 is 
the most workable. We are inviting comments on these alternatives.
    Alternative 1: Optional excludable amount for a portion of a 
bidder's current holdings. Under this alternative, a bidder would have 
the option of subtracting from the current holdings component of the 
NLP, combined with any STRIPS principal components of the security 
being auctioned, up to 35 percent of the combined prior offering 
amounts of that security. We would specify in the offering announcement 
for the reopening the amount of holdings that may be excluded from the 
NLP calculation. The bidder would be required to include in the NLP 
calculation any holdings above this announced excludable amount.
    Here's an example. Suppose we reopen a Treasury note that had a 
previous offering amount of $10 billion by offering an additional $10 
billion. Also suppose that a bidder already holds $3 billion par of 
that note, $1 billion of the note's STRIPS principal component, and no 
other position in the security. That bidder would be able to exclude 
$3.5 billion from its NLP calculation for the reopening auction since 
$3.5 billion is 35 percent of the previous offering amount. We would 
specify this $3.5 billion excludable amount in the reopening offering

[[Page 38602]]

announcement. The bidder's NLP calculation would therefore be $4 
billion minus $3.5 billion, or $0.5 billion. The bidder could be 
awarded up to $3 billion more of the note in the reopening auction. If 
the bidder were to be awarded this amount in the reopening, on the 
settlement date it would have a total of $7 billion, or 35 percent, of 
the total $20 billion of the note outstanding (assuming there were no 
other changes in its position).
    Alternative 2: Eliminate the NLP reporting requirement altogether 
and reduce the 35 percent limit to 25 percent (or some other amount 
below 35 percent). We are including this alternative as a possible 
means to overcome the operational difficulties that can result from 
bidders having to calculate their net long positions shortly before the 
competitive bidding deadline.
    Alternative 3: Keep the current NLP calculation requirement, but 
Treasury would compute the 35 percent limit based on the offering 
amount plus any previous offering amounts. For example, if we offered 
$10 billion of a Treasury security in a previous auction, and we 
offered an additional $10 billion of the security in a reopening, a 
bidder with no net long position would be able to purchase up to $7 
billion ($20 billion  x  .35%) of the reopening offering. (If the 
security were being offered for a third time for an additional $10 
billion, a bidder with no NLP could be awarded the entire amount of the 
reopening.)
    Alternative 4: Continue to calculate the 35 percent limit on the 
reopening public offering amount, but redefine the net long position as 
including only the when-issued position. This was the recommendation of 
the Treasury Borrowing Advisory Committee of The Bond Market 
Association.
    Alternative 5: Keep the current NLP calculation requirement, but 
increase the 35 percent limit. 
    Alternative 6: Retain both the 35 percent limit and the NLP 
reporting requirement as they exist now. 
    In addition to inviting comments on all of the above alternatives, 
we also invite comments on any other alternatives. The preliminary 
views expressed in this notice may change in light of the comments 
received.
    It has been determined that this is not a significant regulatory 
action for purposes of Executive Order 12866.

List of Subjects in 31 CFR Part 356

    Bonds, Federal Reserve System, Government securities, Securities.

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

    Dated: July 19, 2001.
Donald V. Hammond,
Fiscal Assistant Secretary.
[FR Doc. 01-18441 Filed 7-23-01; 11:30 am]
BILLING CODE 4810-39-P