[Federal Register Volume 66, Number 219 (Tuesday, November 13, 2001)]
[Rules and Regulations]
[Pages 56759-56761]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-28435]


=======================================================================
-----------------------------------------------------------------------

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: Final Rule.

-----------------------------------------------------------------------

SUMMARY: The Department of the Treasury (``Treasury,'' ``We,'' or 
``Us'') is issuing in final form 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 amendment modifies the 
calculation of the net long position (``NLP'') to be reported in 
``reopenings,'' which are auctions of additional amounts of previously 
issued securities. A bidder will have the option of subtracting from 
the holdings component of the NLP, combined with any STRIPS \1\ 
principal components of the security being auctioned, an exclusion 
amount that Treasury will publish in the reopening offering 
announcement. The purpose of the modification is to ensure that 
participation in Treasury auctions remains both strong and broad.
---------------------------------------------------------------------------

    \1\ Separate Trading of Registered Interest and Principal of 
Securities.

---------------------------------------------------------------------------
EFFECTIVE DATE: November 13, 2001.

ADDRESSES: You may download this final rule from the Bureau of the 
Public Debt's website at www.publicdebt.treas.gov. It is also available 
for public inspection and copying at the Treasury Department Library, 
Room 1428, 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), 
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.\2\ One of these 
terms is the reporting of net long positions, which we use for limiting 
the amount that we will award to any one bidder in an auction (``the 35 
percent rule''). In this document, we describe the rationale for this 
rule, and why we are changing it. We then discuss the public comments 
that we received in response to the Advance Notice of Proposed 
Rulemaking (``ANPR'') published on July 25, 2001.\3\ Last, we describe 
the final amendment.
---------------------------------------------------------------------------

    \2\ 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.
    \3\ 61 FR 38600 (July 25, 2001).
---------------------------------------------------------------------------

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.\4\ This rule ensures that awards in our 
auctions are distributed to a number of auction participants. This 
principle of broad distribution is intended to encourage participation 
by a significant number of competitive bidders in each auction. Broad 
participation over time keeps our borrowing costs to a minimum and 
helps ensure that Treasury auctions are fair and competitive.
---------------------------------------------------------------------------

    \4\ 31 CFR 356.22(b).
---------------------------------------------------------------------------

    A key component of the 35 percent award limit is the NLP 
calculation.\5\ Currently, 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 each auction.
---------------------------------------------------------------------------

    \5\ 31 CFR 356.13.
---------------------------------------------------------------------------

    The NLP 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 \6\ 
number as the security being auctioned;
---------------------------------------------------------------------------

    \6\ 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.
---------------------------------------------------------------------------

    (2) Positions, in the security being auctioned, in
    (i) When-issued trading,\7\
---------------------------------------------------------------------------

    \7\ 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.
---------------------------------------------------------------------------

    (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),
    (iii) Forward contracts; and
    (3) Holdings of STRIPS principal components of the security being 
auctioned, including when-issued trading positions of such principal 
components.
    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).\8\ If a bidder's total bids exceed the reporting 
threshold but the bidder either has no position or has a net short 
position, it must report an NLP of zero.
---------------------------------------------------------------------------

    \8\ 31 CFR 356.10, 356.13(a).
---------------------------------------------------------------------------

    The application of the NLP reporting requirement and the 35 percent 
award limit in reopenings has caused us to re-examine the rule. In a 
reopening, we apply the 35 percent limit to the public offering amount 
of that specific auction, rather than to the total amount that will be 
outstanding after the settlement date of the reopening. Because a 
bidder must include any holdings of the security being auctioned in its 
NLP calculation, its participation in the reopening may be limited by 
its 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 
amount.
    Reopenings are now more frequent because in February 2000 we 
adopted a

[[Page 56760]]

policy of regular reopenings to preserve the liquidity of our longer-
term securities as our borrowing needs declined.\9\ In addition, we 
conducted Treasury's first auction of four-week bills on July 31, 2001. 
These auctions are reopenings of previously issued Treasury bills. 
Treasury issued a press release on July 23, 2001, that described the 
net long position reporting requirements and the application of the 35 
percent award limit for Treasury four-week bill auctions while we 
considered whether to modify the rule.
---------------------------------------------------------------------------

    \9\ Treasury Press Release dated February 2, 2000.
---------------------------------------------------------------------------

    The development of more frequent reopenings makes it an appropriate 
time to re-examine the application of the NLP and the 35 percent limit 
in auctions.

II. Comments Received in Response to the Advance Notice of Proposed 
Rulemaking

    We published an ANPR for public comment on July 25, 2001,\10\ to 
solicit comments on six alternatives for modifying the calculation of 
the net long position and the 35 percent award limit. We stated at that 
time that we believed Alternative 1 to be the most workable. The 
closing date for comments was September 10, 2001.
---------------------------------------------------------------------------

    \10\ See supra, note 3.
---------------------------------------------------------------------------

    We received eight comments in response to the ANPR \11\--six from 
securities firms, one from a major trade association, and one from the 
debt management advisory committee of a major trade association. Five 
of these commenters favored Alternative 1, while three favored 
Alternative 4.
---------------------------------------------------------------------------

    \11\ The ANPR and 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 final 
rule.
---------------------------------------------------------------------------

    Since all commenters preferred either Alternative 1 or Alternative 
4, we describe them below. Readers may refer to the ANPR for 
descriptions of the other alternatives.

Alternative 1: Optional Exclusion 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, a 
published exclusion amount. 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 
exclusion amount.
    For example, suppose we reopen a Treasury note of which $10 billion 
is already outstanding by offering an additional $9 billion. In the 
example, suppose the reopening offering announcement specifies that the 
exclusion amount is $3.5 billion. Also suppose that a bidder already 
holds $3 billion par of that note, $1 billion of the note's STRIPS 
principal component, and a when-issued position in that note of $1 
billion. That bidder would be able to exclude $3.5 billion of its 
holdings from its NLP calculation for the reopening auction. The 
bidder's holdings components of the NLP would therefore be $4 billion 
minus $3.5 billion, or $0.5 billion. This amount, when added to the $1 
billion when-issued position component, results in a total NLP of $1.5 
billion.\12\ Since the 35% award limit in the reopening would be $3.15 
billion (.35  x  $9 billion), the bidder could be awarded up to $1.65 
billion more of the note in the reopening ($3.15 billion -$1.5 
billion). If the bidder were to be awarded this amount in the 
reopening, on the settlement date it would then have a total of $6.65 
billion, or 35 percent, of the total $19 billion of the note 
outstanding (assuming there were no other changes in its position).
---------------------------------------------------------------------------

    \12\ The bidder would report this amount with its bids if the 
amount, when combined with its bids, equals or exceeds the NLP 
reporting threshold for the auction. See Sec. 356.13(a).
---------------------------------------------------------------------------

    Those commenters that preferred Alternative 1 generally believed 
that it best achieves the goal of fostering broad participation in 
Treasury auctions while still limiting the potential for excessive 
concentration of ownership in a particular marketable Treasury 
security. Two of the commenters who favored Alternative 1 cited 
Alternative 4 as their second choice. Both of these commenters 
expressed concern, however, that since Alternative 4 would not include 
holdings of the security being auctioned in the net long position 
calculation, that it would not sufficiently limit the potential for 
excessive concentration of ownership. While one of the commenters 
acknowledged that Alternative 1 is more complex operationally than 
Alternative 4, it did not believe the operational difficulties of 
efficiently reporting the NLP would be so great as to favor Alternative 
4.

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

    The commenters that preferred Alternative 4 indicated that this 
alternative would allow for the broadest participation in reopening 
auctions. They also indicated that this alternative would be easier to 
implement than Alternative 1 because the net long position calculation 
would be considerably simpler. Those favoring Alternative 4 also 
asserted that Treasury has adequate means at its disposal, such as its 
Large Position Reporting rules \13\ and anti-market manipulation laws, 
to address undue concentrations of ownership.
---------------------------------------------------------------------------

    \13\ 17 CFR Part 420.
---------------------------------------------------------------------------

III. Amendment to the Rule

    After considering the comments we received, we are modifying the 
NLP calculation for reopenings to provide an optional exclusion amount 
for a portion of a bidder's holdings (Alternative 1 in the ANPR). We 
believe this alternative best achieves our goal of fostering broad 
participation in Treasury auctions.
    Accordingly, Sec. 356.13(b) of the Uniform Offering Circular (UOC) 
is restructured and revised. Paragraph (b)(1) has been reorganized so 
that the ``holdings'' components are listed consecutively and then the 
``positions'' components are listed. Paragraph (b)(2) now provides that 
in a reopening a bidder may subtract the published exclusion amount for 
that security from the sum of: (1) its holdings of the security being 
auctioned, and (2) its holdings of STRIPS principal components of the 
security being auctioned.
    A bidder must include any holdings in excess of the exclusion 
amount in calculating and reporting the net long position. A bidder may 
not take advantage of the exclusion amount if its combined holdings are 
zero or less than zero. For example, a bidder who is ``short'' the 
security being auctioned, and whose holdings amount is therefore a 
negative number, cannot make its position more ``short'' by subtracting 
the exclusion amount. Further, if a bidder takes advantage of the 
exclusion amount, it must first calculate its combined holdings before 
subtracting the exclusion amount.
    In addition, a bidder may use the exclusion amount only up to the 
amount of its combined holdings. After subtracting the exclusion amount 
from its combined holdings, the resulting

[[Page 56761]]

amount cannot be included in the NLP calculation as a negative number. 
In other words, a bidder cannot change a long holdings position to a 
short position through use of the exclusion amount.
    We will publish the specific optional exclusion amount in the 
offering announcement for each particular auction. We expect that the 
exclusion amount will be approximately 35 percent of the outstanding 
amount of the particular security (CUSIP) being auctioned, less the 
amount of the outstanding security held by the Federal Reserve for its 
own account. However, bidders must carefully read each offering 
announcement to ensure they are aware of the exact exclusion amount for 
the auction and other details of the particular offering. As provided 
in Sec. 356.10, if the provisions of an offering announcement are 
different from the provisions of the UOC, the announcement takes 
precedence.

IV. Procedural Requirements

    This final rule is not a significant regulatory action for purposes 
of Executive Order 12866. Although we issued an Advance Notice of 
Proposed Rulemaking on July 25, 2001 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 356

    Bonds, Federal Reserve System, Government securities, Securities.

    For the reasons stated in the preamble, we amend 31 CFR Part 356 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 356.13 is amended by revising paragraph (b) to read as 
follows:


Sec. 356.13  Net long position.

* * * * *
    (b) Determination of net long position. (1) The net long position 
must be determined as of the designated reporting time, which is one-
half hour prior to the closing time for receipt of competitive bids. 
Except as modified in (b)(2) in the event of a reopening, a net long 
position includes the par amount of:
    (i) Holdings of outstanding securities with the same CUSIP number 
as the security being auctioned;
    (ii) Holdings of STRIPS principal components of the security being 
auctioned; and
    (iii) Positions, in the security being auctioned, in
    (A) When-issued trading, including when-issued trading positions of 
the STRIPS principal components;
    (B) 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
    (C) Forward contracts that require delivery of the specific 
security being auctioned or of the STRIPS principal component of that 
security.
    (2) In a reopening (i.e., additional issue) of an outstanding 
security, a bidder may subtract the published exclusion amount for that 
security from: its holdings of the outstanding securities (paragraph 
(b)(1)(i) of this section) combined with its holdings of STRIPS 
principal components of the security being auctioned (paragraph 
(b)(1)(ii) of this section). The amount of holdings that may be 
excluded from the net long position calculation will be specified in 
the Treasury offering announcement for that auction. A bidder may not 
take the exclusion if its combined holdings are zero or less than zero. 
The exclusion is optional for bidders. However, if a bidder takes the 
exclusion, it must include any holdings in excess of the exclusion 
amount in calculating its net long position. If the published exclusion 
amount is greater than the bidder's combined holdings (paragraphs 
(b)(1)(i) and (ii) of this section), the combined holdings may be 
calculated as zero, but cannot be included in the calculation as a 
negative number.
* * * * *

    Dated: November 7, 2001.
Donald V. Hammond,
Fiscal Assistant Secretary.
[FR Doc. 01-28435 Filed 11-8-01; 1:19 pm]
BILLING CODE 4810-39-P