[Federal Register Volume 67, Number 51 (Friday, March 15, 2002)]
[Rules and Regulations]
[Pages 11573-11577]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-5918]


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DEPARTMENT OF THE TREASURY

Fiscal Service

31 CFR Part 203

RIN 1510-AA79


Payment of Federal Taxes and the Treasury Tax and Loan Program

AGENCY: Financial Management Service, Fiscal Service, Treasury.

ACTION: Final rule.

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SUMMARY: The Department of the Treasury (Treasury) is amending the 
regulation governing the Treasury Tax and Loan (TT&L) program, to 
provide the Secretary greater flexibility to adjust the rate of 
interest we charge on funds loaned through the existing TT&L investment 
option. In addition, Treasury is making regulatory changes that will 
allow us to test the feasibility of a new investment option known as 
the term investment option. The term investment option would provide 
financial institutions participating in the TT&L investment program 
with another option for borrowing Treasury funds. Under the term 
investment option, Treasury may invest excess balances with TT&L 
participants at a market based rate of interest for a predetermined 
period of time.

DATES: This final rule is effective April 15, 2002.

ADDRESSES: You can download this final rule at the following web site: 
http://www.fms.treas.gov/eftps. You may also inspect and copy this 
final rule at: Treasury Department Library, Freedom of Information Act 
(FOIA) Collection, Room 1428, Main Treasury Building, 1500 Pennsylvania 
Ave., NW., Washington, DC 20220. Before visiting, you must call (202) 
622-0990 for an appointment.

FOR FURTHER INFORMATION CONTACT: Walt Henderson, Senior Financial 
Program Specialist, at (202) 874-6705 or [email protected]; 
Ellen Neubauer, Senior Attorney, at (202) 874-6680 or 
[email protected]; or John Galligan, Director, Cash 
Management Policy and Planning Division, at (202) 874-6590 or 
[email protected].

SUPPLEMENTARY INFORMATION:

Background on the Treasury Tax and Loan Program

    The Treasury Tax and Loan (TT&L) program, 31 CFR part 203 (part 
203), encompasses two separate components--a depositary component 
through which we collect Federal tax deposits and payments from 
business taxpayers for employee withholding and other types of taxes, 
and an investment component through which we invest short-term 
operating balances not needed for immediate cash outlays.
    Through the TT&L depositary component, which comprises nearly 
10,000 commercial financial institutions and Federal Reserve Banks 
(FRBs), we collected over $1.6 trillion in Fiscal Year 2001, 
representing approximately 80 percent of the total Federal annual tax 
receipts, from approximately 5 million business taxpayers.
    Nearly 1,400 of the TT&L depositaries borrow excess short-term 
Treasury operating funds by participating in the investment component 
of the TT&L program. Through agreements executed under this Part, 
participating depositaries borrow Treasury funds in the form of a note 
secured with collateral pledged to Treasury and pay interest to the 
Treasury on these balances. In Fiscal Year 2001, we earned nearly $1 
billion in interest income through the TT&L investment component.

[[Page 11574]]

    The Secretary is required to consider the prevailing market in 
prescribing the rate of interest. (31 U.S.C. 323) In 1978 when the 
interest rate formula was implemented, the overnight repurchase 
agreement market was not mature and a published rate was not available. 
Thus, the TT&L rate was set as an approximation of an overnight 
repurchase agreement rate. At that time, it was generally believed that 
the Federal funds rate averaged twenty-five basis points above the 
volume-weighted average interest rate from overnight repurchase 
agreements secured by Treasury securities and select Agency securities, 
and executed by the Federal Reserve Bank of New York for its monetary 
operations. Historically, the overnight repurchase agreement rate and 
the Federal funds rate generally have moved broadly in tandem.
    On July 30, 1999, we published in the Federal Register a notice of 
proposed rulemaking (NPRM) at 64 FR 41748. The NPRM proposed a change 
to the interest rate we charge on funds loaned through the TT&L 
program, including funds loaned through the direct investment and 
special direct investment programs, from the Federal funds rate less 
twenty-five basis points to an overnight repurchase agreement rate. The 
closing date for submission of comments was September 28, 1999. Copies 
of the comments are available on the Financial Management Service's 
(FMS) web site at http://www.fms.treas.gov/eftps. Based on the comments 
we received, we have reconsidered that change. Instead, we are amending 
Part 203 to allow the Secretary the flexibility to adjust the rate of 
interest, taking into consideration prevailing market conditions.
    The NPRM also sought comment on the extent to which TT&L 
participants were interested in obtaining TT&L funds for a 
predetermined period of time. Given the level of interest expressed for 
this concept, Treasury is considering offering an investment option 
which incorporates a term feature. Amending Part 203 will enable us to 
proceed with the design and testing of this option. The new TT&L 
investment option under consideration is called the term investment 
option and will be designed so that the Treasury may earn a market 
based rate of return on investments with a fixed term. The term 
investment option will provide an additional investment option for 
current TT&L participants and may also increase participation in the 
TT&L program. Treasury expects that the rate of interest earned on term 
investments will reflect a market rate of return for similar funds.
    At a later date, Treasury will also be publishing an NPRM for Part 
203 to reflect terminology changes brought about by the October 2000 
implementation of the Treasury Investment Program (TIP), the component 
of the TT&L program that receives tax collections, invests funds, and 
monitors collateral pledged to secure invested funds and public money.

Comments on the Proposed Rule

    By the close of the comment period on September 28, 1999, we 
received comment letters on the NPRM from 56 financial institutions and 
3 industry trade associations. Following is a discussion of the issues:

Reaction to a Change in the Treasury Tax and Loan Rate of Interest

    All of the commenting financial institutions and one industry trade 
association opposed the change in the TT&L rate of interest proposed in 
the NPRM. All commenting financial institutions stated that the 
proposed rate change (from the Federal funds rate less twenty-five 
basis points to a rate based on the overnight repurchase agreement 
rate) would decrease the level of participation in the TT&L program. 
Several financial institutions, including the largest TT&L investment 
program participants, commented that the proposed TT&L rate of interest 
did not take into account certain characteristics of the program such 
as Treasury's ability to place or call funds with little or no notice 
and prescribed collateral requirements, both of which should be 
factored into the rate. Also, many commenting financial institutions 
expressed concerns about the source and availability of the overnight 
repurchase agreement rate and the lack of historical data associated 
with this rate.

Adjusting the TT&L Rate of Interest

    We agree with the respondents that a TT&L rate based on the 
overnight repurchase agreement rate does not adequately take into 
consideration the embedded option to place or call funds with little or 
no advance notice, nor the administrative costs associated with posting 
and transferring TT&L collateral. Thus, the proposed rate does not meet 
our goal of establishing a rate reflective of the prevailing market for 
a transaction with characteristics economically similar to the TT&L 
investment program. We have therefore deleted those provisions of the 
NPRM that would change the TT&L rate of interest to an overnight 
repurchase rate.
    Nevertheless, we have determined that the best way to ensure that 
the Treasury continues to earn the prevailing market rate of return is 
to periodically review the TT&L rate of interest and make any necessary 
adjustments as market conditions dictate. The final rule therefore 
allows the Secretary to periodically adjust the rate taking into 
consideration the prevailing market for a transaction with 
characteristics similar to the TT&L investment program. This will 
provide Treasury greater flexibility in earning a market based rate of 
return on investments. The rate will be established through TT&L 
Special Notices to Depositaries and will be published in the Federal 
Register and on the FMS web site. A TT&L Special Notice to Depositaries 
is included herein establishing the TT&L rate of interest as the 
Federal funds rate less twenty-five basis points.

Obtaining Funds for a Predetermined Period of Time

    The NPRM sought comment on the extent to which TT&L participants 
were interested in obtaining TT&L funds for a predetermined period of 
time. The majority of commenters noted that the call feature associated 
with TT&L funds made participation in the program less desirable for 
financial institutions. Of the 15 commenters who specifically commented 
on their interest in obtaining TT&L funds for a predetermined period of 
time, 11 expressed some interest in the concept. In further discussions 
with financial institutions regarding the benefits of holding funds for 
a predetermined period of time, financial institutions again generally 
reacted favorably to the concept. Based upon these comments, we are 
considering a new investment component of TT&L, referred to as the term 
investment option.

Description of the Term Investment Option

    The term investment option would provide Treasury with an option to 
invest excess operating funds with participating financial institutions 
for a predetermined period of time. This option is in the early stages 
of development and we anticipate that it will be offered initially on a 
pilot basis. Under this option, Treasury will determine the rate of 
interest taking into consideration the prevailing market and will 
either establish a predetermined rate based on a benchmark or establish 
the rate of interest based on the results of a bidding process. The 
term investment option may be offered by the Treasury at any time there 
are excess operating funds, providing an additional cash management 
tool for placing excess funds. The addition of this option may

[[Page 11575]]

also expand the total capacity within the TT&L program by providing an 
additional investment option for financial institutions, and may 
encourage greater participation. This rule is being amended to give us 
the flexibility to offer this option on a pilot basis and, after 
evaluating the pilot, on an ongoing basis if warranted. Additional 
details regarding the term investment option will be published in 
procedural instructions provided to financial institutions.

Summary of Changes

Definitions

    Main note balance--the phrase main note balance has been added to 
section 203.2 of the final rule to describe the existing open-ended 
note balance maintained by financial institutions currently 
participating in the TT&L investment program. This phrase has been 
added as a means of differentiating between the existing open-ended 
note balance and the new term note balance. The phrase main note 
balance is used in Secs. 203.3; 203.13; 203.19; 203.21; and 203.23 as 
necessary to clarify that certain features of the existing investment 
program, such as how funds move in and out of the main note balance, 
are not applicable to the new term investment option. The features of 
the existing investment program are unchanged. Where the phrase note 
balance is used, it is intended to refer to both the main note balance 
and the term note balance as, for example, in Sec. 203.24 (g).
    Term investment option--the phrase term investment option has been 
added to Sec. 203.2 of the final rule to describe the new investment 
option introduced in this rule. Through the term investment option, 
financial institutions will have the ability to hold excess Treasury 
operating funds for a predetermined period of time. Section 203.23 (f) 
describes the features of this option.
    Term note balance--the phrase term note balance has been added to 
Sec. 203.2 of the final rule to describe the note balance maintained by 
financial institutions participating in the term investment option.
    Treasury Tax and Loan rate of interest--the definition of Treasury 
Tax and Loan (TT&L) rate of interest has been changed in Sec. 203.2 of 
the final rule to clarify that the phrase TT&L rate of interest refers 
only to the rate of interest charged on the main note balance. The 
phrase TT&L rate of interest does not describe the rate of interest 
charged on the term note balance which is addressed in Sec. 203.23. The 
definition of the TT&L rate of interest has also been changed to give 
the Secretary greater flexibility to change the TT&L rate of interest 
when market conditions warrant.
    Collateral requirements. Section 203.24 (b) describes the 
collateral requirements for the term note balance. Financial 
institutions participating in the term investment option will be 
required to pledge collateral sufficient to cover the total term note 
balance prior to the time the term investment is placed. Collateral 
will be pledged in the same manner as collateral for the main note 
balance, although specific collateral requirements may differ. As with 
main note balances, types and valuations of acceptable collateral for 
the term note balance will be published on the Bureau of the Public 
Debt's web site at www.publicdebt.treas.gov.

TT&L Special Notice to Depositaries

    This is notice to Treasury Tax and Loan (TT&L) depositaries 
regarding the rate of interest the Department of the Treasury charges 
on TT&L main note balances, including funds invested through the direct 
investment and special direct investment programs. Effective April 15, 
2002, the TT&L rate of interest is the Federal funds rate published 
weekly by the Board of Governors of the Federal Reserve System less 
twenty-five basis points.

Executive Order 12866

    This final rule does not meet the criteria for a ``significant 
regulatory action'' as defined in Executive Order 12866. Therefore, the 
regulatory review procedures contained therein do not apply.

Regulatory Flexibility Act Analysis

    It is herein certified that this final rule will not have a 
significant economic impact on a substantial number of small entities. 
The basis for this certification is that this final rule does not 
require any actions on the part of or impose any new requirements on 
small entities. Accordingly, a regulatory flexibility analysis is not 
required.

List of Subjects in 31 CFR Part 203

    Banks, Banking, Electronic fund transfers, Taxes.

Authority and Issuance

    For the reasons set out in the preamble, 31 CFR part 203 is amended 
as follows:

PART 203--PAYMENT OF FEDERAL TAXES AND THE TREASURY TAX AND LOAN 
PROGRAM

    1. The authority citation for part 203 continues to read as 
follows:

    Authority: 12 U.S.C. 90, 265-266, 332, 391, 1452(d), 1464(k), 
1767, 1789a, 2013, 2122, and 3102; 26 U.S.C. 6302; 31 U.S.C. 321, 
323 and 3301-3304.


    2. Amend Sec. 203.2 by revising paragraph (g); redesignating 
paragraphs (w) through (dd) and (ee) through (kk) as paragraphs (x) 
through (ee) and (hh) through (nn), respectively; adding new paragraph 
(w); revising newly redesignated paragraphs (x) and (dd); adding new 
paragraphs (ff) and (gg); and revising newly redesignated paragraph 
(nn) to read as follows:


Sec. 203.2  Definitions.

* * * * *
    (g) Direct investment means placement of Treasury funds with a 
depositary and a corresponding increase in a depositary's main note 
balance.
* * * * *
    (w) Main note balance means an open-ended interest-bearing note 
balance maintained at the FRB of the district.
    (x) Note option means that program available to a TT&L depositary 
under which Treasury invests in obligations of the depositary. The 
amount of such investments will be evidenced by interest-bearing note 
balances maintained at the FRB of the district.
* * * * *
    (dd) Special direct investment means the placement of Treasury 
funds with a depositary and a corresponding increase in a depositary's 
main note balance, where the investment specifically is identified as a 
``special direct investment'' and may be secured by collateral retained 
in the possession of the depositary pursuant to the terms of 
Sec. 203.24(c)(2)(i).
* * * * *
    (ff) Term investment option means the program available to 
financial institutions that offers the ability to borrow excess 
Treasury operating funds for a predetermined period of time.
    (gg) Term note balance means an interest-bearing note balance 
maintained at the FRB of the district for a predetermined period of 
time.
* * * * *
    (nn) Treasury Tax and Loan (TT&L) rate of interest means the 
interest charged on the main note balance. The TT&L rate of interest is 
the rate prescribed by the Secretary taking into

[[Page 11576]]

consideration prevailing market interest rates. The rate and any rate 
changes will be announced through a TT&L Special Notice to Depositaries 
and will be published in the Federal Register and on a web site 
maintained by Treasury's Financial Management Service at 
http://www.fms.treas.gov.

    3. Amend Sec. 203.3 to revise paragraph (c) to read as follows:


Sec. 203.3  Financial institution eligibility for designation as a 
Treasury Tax and Loan depositary.

* * * * *
    (c) In order to be designated as a TT&L depositary for the purposes 
of processing tax deposits in the FTD system, a financial institution 
shall possess under its charter either general or specific authority 
permitting the maintenance of the TT&L account, the balance of which is 
payable on demand without previous notice of intended withdrawal. In 
addition, note option depositaries shall possess either general or 
specific authority permitting the maintenance of a note balance. In the 
case of note option depositaries maintaining main note balances, the 
authority shall permit the maintenance of a main note balance which is 
payable on demand without previous notice of intended withdrawal.

    4. Amend Sec. 203.13 to revise paragraphs (b), (c)(1), and (d) (1) 
to read as follows:


Sec. 203.13  Same-day reporting and payment mechanisms.

* * * * *
    (b) Fedwire value transfer. To initiate a Fedwire value tax 
payment, the financial institution shall be a Fedwire participant and 
shall comply with the FRB's Fedwire format for tax payments. The 
taxpayer's financial institution shall provide the taxpayer, upon 
request, the IMAD and the ETA reference numbers for a Fedwire value 
transfer. The financial institution may obtain the ETA reference number 
for Fedwire value transfers from its FRB by supplying the related IMAD 
number. Fedwire value transfers settle immediately to the TGA and thus 
are not credited to a depositary's main note balance.
    (c) * * *
    (1) For a note option depositary using a Fedwire non-value 
transaction, the tax payment amount will be credited to the 
depositary's main note balance on the day of the transaction.
* * * * *
    (d) * * *
    (1) For a note option depositary using a Direct Access transaction, 
the tax payment amount will be credited to the depositary's main note 
balance on the day of the transaction.
* * * * *

    5. Revise Sec. 203.19 to read as follows:


Sec. 203.19  Note option.

    (a) Late delivery of advices of credit. If an advice of credit does 
not arrive at the FRB before the designated cutoff hour for receipt of 
such advices, the FRB will post the funds to the main note balance as 
of the next business day after the date on the advice of credit. This 
is the date on which funds will begin to earn interest for Treasury.
    (b) Transfer of funds from TT&L account to the main note balance. 
For a depositary selecting the note option, funds equivalent to the 
amount of deposits credited by a depositary to the TT&L account shall 
be withdrawn by the depositary and credited to the main note balance on 
the business day following the receipt of the tax payment.

    6. Revise Sec. 203.21 to read as follows:


Sec. 203.21  Scope of the subpart.

    This subpart provides rules for TT&L depositaries on crediting main 
note balances under the various payment methods; debiting main note 
balances; maintaining term note balances; and pledging collateral 
security.

    7. Amend section 203.22 to remove ``and'' at the end of paragraph 
(b), revise paragraph (c) and add paragraph (d) to read as follows:


Sec. 203.22  Sources of balances.

* * * * *
    (c) Direct investments and special direct investments pursuant to 
subpart D of this part; and
    (d) Other excess Treasury operating funds.

    8. Amend Sec. 203.23 by revising paragraphs (a)(1), (a)(2), (c), 
(d), and (e); and adding paragraph (f) to read as follows:


Sec. 203.23  Note balance.

    (a)* * *
    (1) FTD system. A depositary processing tax deposits using the FTD 
system and electing the note option shall debit the TT&L account and 
credit its main note balance as stated in Sec. 203.19(b).
    (2) EFTPS--(i) ACH debit and ACH credit. A note option depositary 
processing EFTPS ACH debit entries and/or ACH credit entries shall 
credit its main note balance for the value of the transactions on the 
date that an exchange of funds is reflected on the books of the Federal 
Reserve Bank of the district. Financial institutions may refer to the 
procedural instructions for information on how to ascertain the amount 
of the credit to the main note balance.
    (ii) Fedwire non-value and Direct Access. A note option depositary 
processing Fedwire non-value and/or Direct Access transactions pursuant 
to subpart B of this part shall credit its main note balance and debit 
its customer's account for the value of the transactions on the date 
ETA receives and processes the transactions.
* * * * *
    (c) Main note balance withdrawals. The amount of the main note 
balance shall be payable on demand without prior notice. Calls for 
payment on the note will be by direction of the Secretary through the 
FRBs. On behalf of Treasury, the FRB shall charge the reserve account 
of the depositary or the depositary's designated correspondent on the 
day specified in the call for payment.
    (d) Interest. A main note balance shall bear interest at the TT&L 
rate. Such interest is payable by a charge to the Federal Reserve 
account of the depositary or its designated correspondent in the manner 
prescribed in the procedural instructions.
    (e) Maximum balance--(1) Note option depositaries. A depositary 
selecting the note option shall establish a maximum for its main note 
balance by providing notice to that effect in writing to the FRB of the 
district. The maximum balance is the amount of funds for which a main 
note option depositary is willing to provide collateral in accordance 
with Sec. 203.24(c)(1). The depositary shall provide the advance notice 
required in the procedural instructions before reducing the established 
maximum balance unless it is a reduction resulting from a collateral 
re-evaluation as determined by the depositary's FRB. That portion of 
any advice of credit or EFTPS tax payment, which, when posted at the 
FRB, would cause the main note balance to exceed the maximum balance 
amount specified by the depositary, will be withdrawn by the FRB that 
day.
    (2) Direct investment depositaries. A main note option depositary 
that participates in direct investment shall set a maximum for its main 
note balance for direct investment purposes which is higher than its 
peak balance normally generated by the depositary's advices of credit 
and EFTPS tax payment inflow. The direct investment note option 
depositary shall provide the advance notice required in the procedural 
instructions before reducing the established maximum balance.
    (3) Special direct investment depositaries. Special direct 
investments,

[[Page 11577]]

when credited to the main note balance, shall not be considered in 
setting the amount of the maximum balance or in determining the amounts 
to be withdrawn where a depositary's maximum balance is exceeded.
    (f) Term investment option. Treasury may, from time to time, invest 
excess operating funds in obligations of depositaries selecting the 
term investment option. Such obligations shall be in the form of 
interest-bearing notes payable upon a predetermined period of time not 
to exceed 90 days. Such notes shall bear interest at a rate prescribed 
by the Secretary by auction or otherwise taking into consideration 
prevailing market interest rates.

    9. Amend Sec. 203.24 to revise paragraph (a); redesignate 
paragraphs (b) through (f) as paragraphs (c) through (g), respectively; 
add a new paragraph (b); and revise newly redesignated paragraph (d)(1) 
to read as follows:


Sec. 203.24  Collateral security requirements.

* * * * *
    (a) Note option--main note balance--(1) FTD deposits and EFTPS tax 
payments. A depositary shall pledge collateral security in accordance 
with the requirements of paragraphs (d)(1), (e), and (f) of this 
section in an amount that is sufficient to cover the pre-established 
maximum balance for the main note balance, and, if applicable, the 
closing balance in the TT&L account which exceeds recognized insurance 
coverage. Depositaries shall pledge collateral for the full amount of 
the maximum balance at the time the maximum balance is established. If 
the depositary maintains a TT&L account, the depositary shall pledge 
collateral security before crediting deposits to the TT&L account.
    (2) Direct investments. A note option depositary that participates 
in direct investment is not required to pledge collateral continuously 
in the amount of the pre-established maximum balance. However, each 
note option depositary participating in direct investment shall pledge, 
no later than the day the direct investment is placed, the additional 
collateral in accordance with paragraphs (d)(1), (e), and (f) of this 
section to cover the total main note balance including those funds 
received through direct investment. If a direct investment depositary 
has a history of frequent collateral deficiencies, it shall fully 
collateralize its maximum balance at all times.
    (3) Special direct investments. Before special direct investments 
are credited to a depositary's main note balance, the note option 
depositary shall pledge collateral security, in accordance with the 
requirements of paragraphs (d)(2) and (f) of this section, to cover 100 
percent of the amount of the special direct investments to be received.
    (b) Note option--term note balance. Each note option depositary 
participating in the term investment program shall pledge, prior to the 
time the term investment is placed, collateral in accordance with 
paragraphs (d) (1), (e), and (f) of this section sufficient to cover 
the total term note balance.
* * * * *
    (d) Deposits of securities. (1) Collateral security required under 
paragraphs (a)(1), (2), (b), and (c) of this section shall be deposited 
with the FRB of the district, or, where appropriate, with a custodian 
or custodians within the United States designated by the FRB, under 
terms and conditions prescribed by the FRB.
* * * * *

    Dated: October 26, 2001.
Kenneth R. Papaj,
Acting Commissioner.
[FR Doc. 02-5918 Filed 3-14-02; 8:45 am]
BILLING CODE 4810-35-P