[Federal Register Volume 67, Number 82 (Monday, April 29, 2002)]
[Proposed Rules]
[Pages 20934-20937]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-10547]


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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; Reporting of Net Long Position and Application of the 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 timing of the 
calculation and reporting of the net long position (``NLP'') in 
marketable Treasury securities auctions. In addition, we are asking for 
comments on the application of the 35 percent award limit and on a 
potential change in the NLP reporting threshold. The purpose of any 
such modifications would be to more effectively meet the objectives of 
these two areas of the auction rules while ensuring that participation 
in Treasury securities auctions remains both strong and broad, with 
minimal compliance costs for participants. Realization of these goals 
will help us attain the lowest possible borrowing costs over time. We 
are specifically interested in comments on alternatives that change the 
time as of which the NLP is calculated (the ``NLP as-of time'') and the 
NLP reporting deadline, as well as alternatives that would permit us to 
replace or eliminate the NLP reporting requirement.

DATES: Submit comments on or before June 28, 2002.

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

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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,\1\ in 
conjunction with the offering announcement for each auction, provides 
the terms and conditions for the sale and issuance of marketable 
Treasury bills, notes and bonds to the public. One of these terms 
(rules) is the requirement that a bidder in an auction report its net 
long position (``NLP'') if its NLP in the security being auctioned plus 
its bids in the auction meet or exceed a certain dollar-amount 
threshold stated in the auction offering announcement. The reporting 
dollar-amount threshold currently is $1 billion for Treasury bills and 
$2 billion for Treasury notes and bonds. Currently, a bidder must 
determine its NLP as of one-half hour prior to the deadline for receipt 
of competitive bids; if it meets or exceeds the reporting threshold as 
of that time, the bidder must report its NLP by the competitive bidding 
deadline.
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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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    A bidder's reported NLP is a component of our auction award limit, 
which is 35 percent of the offering amount less the bidder's reported 
NLP. For example, assume a bidder has an NLP of $2 billion, and the 35 
percent award limit for a particular auction is $4 billion. If the 
bidder is successful in the auction and as a result of its bids alone 
would receive $4 billion, its award will be cut back to $2 billion.
    In this notice, we first describe these rules and their rationale, 
and why we are considering a change. Then we describe various 
alternatives on which we are seeking comment.

I. The 35 Percent Limit and Net Long Position Reporting

    The 35 percent rule limits auction awards for any one competitive 
bidder to 35 percent of the total amount offered to the public in a 
particular auction, less the bidder's reported NLP.\2\ This rule 
ensures that awards in our auctions are distributed to a number of 
auction participants. This goal 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 NLP 
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 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). For example, if an 
investor has bought $900 million of a security in the when-issued 
market, and it has sold $300 million of the same security in the when-
issued market, it has a net long position of $600 million in that 
security, assuming it has no other positions. The components of the NLP 
are intended to capture the various ways that a bidder can acquire a 
Treasury security.\4\
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    \4\ See 31 CFR 356.13(b) for details on the components of the 
net long position. See also 66 FR 56759 (November 13, 2001), which 
provided an optional exclusion amount in the NLP calculation for 
reopenings.
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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 \5\ (unless otherwise stated in the offering 
announcement). In addition, if the sum of its bids equals or exceeds 
the NLP reporting threshold, but it has no position or has a net short 
position, it must report a zero.
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    \5\ 31 CFR 356.13(a).
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    A bidder must determine its NLP as of one-half hour (e.g., 12:30 
p.m.) prior to the competitive bidding deadline (e.g., 1 p.m.).\6\ This 
is a ``snapshot'' or point-in-time measurement. If a bidder's position 
changes during the final half-hour period before the auction, this does 
not affect the amount to be reported under our rules. Currently, we 
give bidders 30 minutes to calculate and report their NLPs primarily 
because of the operational complexities involved in aggregating this 
information when a bidder has numerous affiliates.
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    \6\ 31 CFR 356.13(b).
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    The NLP reporting requirement is not fully effective in encouraging 
broad distribution of Treasury securities, however, because of this 
half-hour time lag between the NLP as-of time and the competitive 
bidding deadline. Because a bidder's NLP can change significantly 
during this time period, the reported NLP may not provide an accurate, 
or even approximate, measure of a bidder's position at the time that a 
bidder actually submits its bids. As a result, a bidder's award may be 
cut back to the 35 percent limit based on NLP information that no 
longer reflects the bidder's actual NLP. Conversely, a bidder's award 
may not be cut back if it builds a large position in the security being 
auctioned between the NLP as-of time and the competitive bidding 
deadline.
    Moreover, our experience with the NLP rule in general is that 
participants occasionally have operational difficulties in compiling 
and reporting NLPs. There may be other ways to achieve the goals of the 
rule while reducing these difficulties. For this reason, we are also 
more fundamentally reconsidering the rule.
    We asked the Treasury Borrowing Advisory Committee of The Bond 
Market Association \7\ to consider an alternative to address this issue 
in January 2002. The alternative was to separate NLP reporting from 
auction bidding by having bidders determine their NLPs as of the 
competitive bidding deadline, usually 1 p.m., and report them after the 
close of the auction. Under this scenario, Treasury would base its 
auction awards solely on the amounts bid, and bidders would be 
responsible for ensuring that their bids, combined with their NLPs, did 
not result in their exceeding the 35 percent award limit.
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    \7\ The Committee, which is comprised of securities industry 
representatives, provides periodic advice to Treasury on debt 
management issues. See, Pub. L. 103-202, Sec. 202, 107 Stat. 2356, 
31 U.S.C. 3121 note.
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    The Committee responded that this alternative, ``while somewhat 
more burdensome to the bidder,'' was ``manageable practically,'' but 
was concerned about shifting the burden of

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enforcing the 35 percent award limit from the Treasury to bidders. 
Under this ``self policing'' scenario, the Committee contended, bidders 
would be likely to reduce the amount of their auction bids leading to 
smaller bid/cover ratios and possibly weaker auction results.\8\
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    \8\ Report to the Secretary of the Treasury from the Treasury 
Borrowing Advisory Committee of The Bond Market Association (dated 
January 30, 2002). The report is available at www.treas.gov. See 
also Minutes of the Meeting of the Treasury Borrowing Advisory 
Committee of The Bond Market Association (January 29, 2002).
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    We also invited suggestions from the public during the February 
2002 quarterly refunding announcement on ways to improve the NLP 
rule.\9\ In addition to separating the NLP reporting from auction 
bidding, we stated that we were also considering moving the NLP as-of 
time closer to the competitive bidding deadline.
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    \9\ February 2002 Quarterly Refunding Statement (January 30, 
2002).
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    We received one response on this topic, from The Bond Market 
Association.\10\ The Association recommended, among other things, that 
Treasury refrain from making any major modifications to the current NLP 
reporting requirements. Nevertheless, the Association suggested that we 
consider three relatively ``minor'' rule changes: ``(i) increasing the 
current NLP reporting threshold to 35 percent of the issuance amount; 
(ii) requiring bidders to calculate their NLP as of 12:40 p.m. rather 
than 12:30 p.m.; and (iii) instructing bidders not to report any NLP 
when they are above the applicable reporting threshold but their NLP is 
either zero or a negative number.'' We also received other responses, 
but not on this topic.
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    \10\ Letter from Eric L. Foster, Vice President and Assistant 
General Counsel, The Bond Market Association, to Brian C. Roseboro, 
Assistant Secretary for Financial Markets, dated March 13, 2002. The 
letter comments on some of the alternatives in this notice. It is 
available on The Bond Market Association website at 
www.bondmarkets.com.
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II. Alternatives

    We are considering, and inviting public comments on, four 
alternatives to reach our goal of maintaining strong and broad 
participation in fair and competitive Treasury auctions while 
minimizing the costs of compliance with the auction rules. Realization 
of this goal will help us attain the lowest possible borrowing costs 
over time. In addition, we are inviting comments on potential changes 
to the NLP reporting threshold amount.
    Substantive rule changes (timing or fundamental). The first two 
alternatives maintain the requirement to report the NLP, but modify the 
time that it must be determined or reported, or both, to make the 
reporting process more effective. The third alternative would eliminate 
the NLP reporting requirement, and the last would keep it as it is.
    Alternative 1. Reduce the half-hour interval between the NLP as-of 
time and the competitive bidding deadline. For example, would the NLP 
reporting rule be more effective if the as-of time were moved closer to 
the competitive bidding deadline (e.g., 1:00), such as 12:40 or 12:45? 
Would this modification be feasible operationally? We specifically 
invite comments on the optimal NLP determination time.
    Alternative 2. Make the NLP as-of time the same as the competitive 
bidding deadline, with the NLP reporting time to follow (for example, 
one-half hour later). Bidders would be responsible for ensuring that 
their bids plus their positions, if they are net long, do not exceed 
the 35 percent award limit. For example, the NLP as-of time and the 
competitive bidding deadline could both be set at 1:00, with NLPs to be 
reported by 1:30. Violations of the rule could be handled as follows. 
First, to encourage aggressive bidding and to alleviate bidder concerns 
about accidental breaches of the NLP rule, in the case of most minor or 
technical errors there would be minimal or no sanction. Second, we 
would promulgate a new rule to handle more serious rule violations, 
namely those with a potential impact on the liquidity of the Treasury 
securities market (e.g., significantly exceeding the 35 percent limit). 
The NLP rule is premised on the conviction that one bidder's taking the 
bulk of an auction may discourage other bidders from bidding 
aggressively in future auctions, or even from bidding at all. In either 
case, the liquidity of Treasury securities would diminish, and 
Treasury's long-term borrowing costs would rise. This new rule would 
allow us to impose liquidated damages based on Treasury's increased 
borrowing costs. Third, in the case of the most serious violations, 
Treasury would employ existing enforcement mechanisms prohibiting the 
bidder from participating in future auctions for its own account, for 
the account of others, or both,\11\ as well as pursuing criminal and 
civil remedies under the Federal securities and other laws.
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    \11\ 31 CFR 356.34(a).
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    Alternative 3. Eliminate the NLP reporting requirement, and either 
maintain or reduce the 35 percent limit. Treasury would rely on its 
Large Position Reporting rules,\12\ and other mechanisms to monitor the 
market and address concentrations of ownership. This would reduce the 
operational difficulties and burdens bidders face in reporting their 
NLPs near the same time that they also are determining the amounts and 
yields at which they are bidding. The downside for the Treasury market 
(and thus ultimately for the taxpayer) would be a more limited ability 
for Treasury to control ownership concentration in the Treasury market 
through the auction process.
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    \12\ 17 CFR 420.
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    Alternative 4. Retain both the 35 percent limit and the NLP as-of 
and reporting timeframes as they exist now.
    Potential change to NLP reporting threshold amount. Currently a 
bidder must report its NLP if its bids plus its NLP equals or exceeds 
$1 billion for bills, or $2 billion for notes and bonds (unless 
otherwise stated in the auction offering announcement).\13\ As noted 
above, if a bidder either has no position or has a net short position 
but the total of all of its bids equals or exceeds the NLP threshold 
amount for a particular auction, the bidder must report a zero as its 
NLP.
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    \13\ 31 CFR 356.13(a).
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    We are considering changing the NLP reporting threshold to equal 
the actual 35 percent award limit for each auction, which we would 
provide on the offering announcement. Bidders whose bids plus NLPs 
equal or exceed the limit would be required to report their positions. 
For example, if the 35 percent award limit for a particular auction is 
$3 billion, and the total of a bidder's bids is $2.5 billion and its 
NLP is $1 billion, the bidder would have to report its $1 billion NLP. 
Bidders whose bids plus NLPs did not equal or exceed the limit would 
not be required to report any positions. Bidders whose total bids equal 
or exceed the limit but either have no position or a net short position 
would not have to report a zero as their NLP. We are requesting comment 
on this alternative because we are considering making this change 
regardless of whether or not we implement any modifications to the NLP 
as-of or reporting timeframes.
    In addition to inviting comments on all of the above alternatives, 
we also invite comments on any other alternatives.
    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.


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    Dated: April 24, 2002.
Donald V. Hammond,
Fiscal Assistant Secretary.
[FR Doc. 02-10547 Filed 4-25-02; 10:29 am]
BILLING CODE 4810-39-P