[Federal Register Volume 67, Number 147 (Wednesday, July 31, 2002)]
[Proposed Rules]
[Pages 49630-49634]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-19238]


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DEPARTMENT OF THE TREASURY

17 CFR Part 420

RIN 1505-AA88


Government Securities Act Regulations: Large Position Rules

AGENCY: Office of the Assistant Secretary for Financial Markets, 
Treasury.

ACTION: Proposed rule.

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SUMMARY: The Department of the Treasury (``Treasury,'' ``We,'' or 
``Us'') is publishing for comment proposed amendments to the reporting 
requirements pertaining to very large positions in certain Treasury 
securities. The regulations are issued under the Government Securities 
Act Amendments of 1993 (``GSAA''). The purpose of the rules is to 
provide Treasury with information to better understand the causes of 
market shortages in certain Treasury securities. We are proposing 
changes to improve the information available to Treasury. Specifically, 
we are proposing to modify the report to require separate reporting of 
certain components of the ``net trading position'' and the ``gross 
financing position.'' We are also proposing to revise the current 
``memorandum'' item to require that the par amount of securities 
delivered through repurchase agreements be separated by maturity 
classification. In addition, we are proposing to add a new memorandum 
item to the large position report that would report the gross par 
amount of ``fails to deliver.'' Finally, we are proposing to modify the 
definition of ``gross financing position'' to eliminate the optional 
exclusion in the calculation of the amount of securities received 
through certain financing transactions.

DATES: Submit comments on or before September 16, 2002.

ADDRESSES: You may send hard copy comments to: Government Securities 
Regulations Staff, Bureau of the Public Debt, 999 E Street N.W., Room 
315, Washington, D.C. 20239-0001. 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 proposed rule, and review the comments 
we receive, from the Bureau of the Public Debt's website at 
www.publicdebt.treas.gov. The proposed rule and comments will also be 
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), 
Lee Grandy (Associate Director), or Nadir Isfahani (Government 
Securities Advisor), Bureau of the Public Debt, Government Securities 
Regulations Staff, (202) 691-3632 or e-mail us at 
[email protected].

SUPPLEMENTARY INFORMATION: Treasury published final rules \1\ in 1996 
that established Part 420 providing recordkeeping and reporting 
requirements related to very large positions in certain Treasury 
securities.\2\ We are re-examining the ``large position rules'' and 
proposing modifications to improve the information available to better 
understand the causes of market shortages in certain Treasury 
securities. In this notice, we first provide background on the rules 
and then describe the proposed changes.
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    \1\ 61 FR 48338 (September 12, 1996).
    \2\ 17 CFR Part 420.

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[[Page 49631]]

I. Background

A. Statutory Authority

    In response to short squeezes in two-year Treasury notes that 
occurred in the government securities market in 1990-1991, Congress 
included in the GSAA \3\ a provision granting Treasury new authority to 
prescribe rules requiring any person or entity holding, maintaining, or 
controlling large positions in to-be-issued or recently-issued Treasury 
securities to keep records and, when requested by Treasury, to file 
reports of such large positions. The provision was intended to improve 
the information available to Treasury, the Federal Reserve Bank of New 
York (as Treasury's agent), and the Securities and Exchange Commission 
(referred to as ``regulators'' in this notice) regarding very large 
positions in Treasury securities held by market participants and to 
ensure that regulators have the tools necessary to understand unusual 
conditions in the Treasury securities market.
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    \3\ Pub. L. 103-202, 107 Stat. 2344 (1993) [15 U.S.C. 78o-5(f)].
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B. Reporting and Recordkeeping Requirements

1. On-Demand Reporting System
    The rules provide for an ``on-demand'' reporting system rather than 
a regular, ongoing system of reporting.\4\ This approach achieves the 
intent described above, satisfies the requirement that the rules take 
into account any impact on the efficiency and liquidity of the Treasury 
securities market and the cost to taxpayers of funding the federal 
debt,\5\ and also minimizes the costs and burdens to those entities 
affected by the rules.
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    \4\ The rules were issued on September 12, 1996, and were 
effective on March 31, 1997. They established a new Part 420 of the 
regulation issued by Treasury in 17 CFR, Chapter IV, Subchapter A.
    \5\ See supra note 3.
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2. Notice Requesting Large Position Reports
    Large position reports must be filed with the Federal Reserve Bank 
of New York (``FRBNY'') in response to a notice from us requesting 
large position information on a specific issue of a Treasury security 
by entities with positions that equal or exceed the reporting threshold 
specified in the notice (currently not less than $2 billion).\6\ The 
reports must be received by the FRBNY before noon Eastern time on the 
fourth business day after the issuance of the Treasury press release 
calling for large position information.
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    \6\ The notice is in the form of a press release we issue and 
subsequently publish in the Federal Register. We also provide the 
press release to major news and financial publications and wire 
services for dissemination. An electronic mailing list is also 
available at www.publicdebt.treas.gov.
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3. Components of a Position
    A ``reportable position'' is the sum of the net trading position, 
the gross financing position and the net fails position in a specified 
issue of a Treasury security collectively controlled by a reporting 
entity.\7\ Specific components of these positions are identified at 
Sec. 420.2. All positions are required to be reported at par value on a 
trade date basis.
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    \7\ 17 CFR 420.2(h).
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4. Recordkeeping
    The recordkeeping requirements provide that any person or entity 
controlling at least a $2 billion position in a specific Treasury 
security must maintain and preserve certain records that enable the 
entity to compile, aggregate and report large position information.\8\
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    \8\ 17 CFR 420.4.
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C. Who Is Subject to the Rules

    Treasury's large position recordkeeping and reporting rules apply 
to all persons and entities, foreign and domestic, that control a 
reportable position in a Treasury security, such as: government 
securities brokers and dealers; registered investment companies; 
registered investment advisers; custodians, including depository 
institutions, that exercise investment discretion; hedge funds; pension 
funds; insurance companies; and foreign affiliates of U.S. entities. 
The broad application of the rule to include both foreign and domestic 
entities is consistent with the statutory purpose of the GSAA.\9\
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    \9\ H.R. Rep. 103-255, September 23, 1993.
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    The rules provide a total exemption for foreign central banks, 
foreign governments and international monetary authorities (e.g., the 
World Bank) (collectively, foreign official organizations).\10\ This 
exemption is consistent with the position expressed by the Senate and 
House during consideration of the legislation.\11\ Federal Reserve 
Banks are also exempt for the portion of any reportable position they 
control for their own account.
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    \10\ This exemption does not extend to an entity that engages 
primarily in commercial transactions and that is owned in whole or 
in part by a foreign official organization. See 17 CFR 420.1(b).
    \11\ 139 Cong. Rec. H-10967 (daily ed. November 22, 1993) 
Statement of Chairman Dingell on S. 422.
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    Consistent with our policy view as expressed when the rules were 
adopted, we would like to reiterate that large positions are not 
inherently harmful, and that there is no presumption of manipulative or 
illegal intent on the part of the controlling entity merely because its 
position is large enough to be subject to Treasury's rules.

D. Test Calls

    Since the rules became effective in 1997, we have conducted annual 
calls for reports to test the accuracy and reliability of large 
position reporting systems. These tests have given us valuable 
experience and insight as we consider how to improve the information 
provided to regulators. This experience, in addition to our ongoing 
need to take into account the liquidity and efficiency of the Treasury 
securities market, has caused us to re-examine the rules and propose 
certain modifications. The proposed changes reflect our continuing need 
for the ability to obtain useful information, while minimizing the 
costs and burdens on market participants. We believe these changes are 
consistent with the findings of Congress that (among other things) 
``(1) the liquid and efficient operation of the government securities 
market is essential to facilitate government borrowing at the lowest 
possible cost to taxpayers; and (2) the fair and honest treatment of 
investors will strengthen the integrity and liquidity of the government 
securities market.'' \12\
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    \12\ See supra note 3.
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II. Analysis

A. Changes to the Large Position Calculation and Report

    We are proposing changes to:
    1. Section 420.3(c)(1) and (c)(3), and Appendix B, to require each 
of the five components in Sec. 420.2(f)(1)-(5) that, together, comprise 
the ``net trading position,'' to be reported separately. Since entities 
already are collecting this information to calculate their total net 
trading position, we believe that the separation of these components 
should not prove to be burdensome.
    2. Section 420.3(c)(1) and (c)(3), and Appendix B to revise the 
reporting of the ``gross financing position'' to require entities to 
separate the reverse repurchase agreement components by maturity 
classification (i.e., break out reverse repurchase agreements as either 
``overnight and open'' or ``term''). Similarly, we are proposing to 
revise the current memorandum item to require that the total gross par 
amounts of securities delivered through repurchase agreements be 
reported by maturity classification. The separate reporting of these 
individual components in the

[[Page 49632]]

large position formula, as well as the separation of reverse repurchase 
agreements and repurchase agreements by maturity classification, would 
help us to better understand the reporting entity's degree of control 
and economic interest in the particular security. The separate 
reporting of components would not affect whether a reporting entity 
ultimately has to file a report in response to a particular call since 
it would result in the same total reportable position as under the 
current formula.
    3. Section 420.3(c)(2) and Appendix B to add a second memorandum 
item to the large position information for the gross par amount of 
``fails to deliver.'' This would help us to better understand a 
reporting entity's fails situation without increasing the burden on 
reporting entities since fails to deliver are already factored into the 
``net fails position'' component.
    Although no changes are being proposed to the recordkeeping 
requirements at Sec. 420.4, reporting entities are reminded that they 
will need to ensure that they maintain records of all of the items that 
may be reported.

B. Voluntary Optional Exclusion

    Finally, we are proposing to amend the definition of ``gross 
financing position'' at Sec. 420.2(c) to eliminate the optional 
exclusion for certain securities received through financing 
transactions. A conforming change would also be made to item 2 
``Gross Financing Position'' in Appendix B to Part 420 (Sample Large 
Position Report) to reflect the elimination of the optional exclusion.
    The current rules allow a reporting entity to elect to reduce its 
gross financing position by the par amount of the securities received 
in transactions: In which the counterparty retains the right to 
substitute securities; that are subject to third party custodial 
relationships; or that are hold-in-custody agreements. Our proposed 
change would eliminate the exclusion in its entirety. We believe this 
change could enhance the usefulness of the large position reports to 
regulators. In the preamble to the initial proposed large position 
regulations,\13\ we stated that the rules provided the optional 
exclusion because of a presumption that the ``receiving organization'' 
does not have effective control of the securities received in these 
particular transactions. We now believe that this information could 
facilitate a better understanding of the causes of a market shortage of 
a particular security, and that the benefits of including this 
information are likely to outweigh any potential burden to market 
participants. Also, it would ensure consistent treatment of overnight 
reverse repurchase transactions and term reverse repurchase agreements 
where the counterparty has a right of substitution. We specifically 
invite comments from market participants concerning any potential 
obstacles, burdens or other factors related to this proposed change.
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    \13\ 60 FR 65219 (December 18, 1995).
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    In re-examining the current voluntary optional exclusion, we are 
particularly concerned that in certain situations a market participant 
might be relying on the ``right to substitute'' provision of the 
optional exclusion in cases where the counterparty may not have a 
remaining, immediate, exercisable, explicitly documented right to 
substitute securities with respect to the particular transaction. For 
example, if a counterparty's right to substitute securities could not 
be exercised until 10 days after the ``as of'' large position reporting 
date, then at the time of the large position report such a right of 
substitution does not meaningfully limit the control over the 
securities in question by the party that has received them. Therefore, 
it may not be appropriate for the rules to permit that party to elect 
the voluntary exclusion when filing its large position report. 
Commenters are specifically invited to address whether contract terms 
such as the ``right to substitute securities,'' or tri-party 
relationships or hold-in-custody agreements should still be given 
special consideration. Would clarification of the ``right to 
substitute'' provision of the optional exclusion, while retaining the 
exclusion for securities that are subject to tri-party relationships or 
hold-in-custody agreements, be an alternative that should be given 
further consideration? Commenters are also invited to address a third 
alternative, which is to retain the optional exclusion only for reverse 
repurchase agreements held in tri-party or hold-in-custody 
arrangements.
    We welcome comments on all of these proposed changes, in 
particular: (1) Whether the changes would accomplish the goal of 
providing Treasury with more useful information regarding 
concentrations of control; (2) the effect, if any, the proposed changes 
would have on market participants; and (3) whether, based on the 
proposed changes, the current three and a half day reporting timeframe 
would be sufficient to allow reporting entities to complete the revised 
large position report.

III. Special Analysis

    The proposed amendments reflect Treasury's continuing interest in 
meeting regulators' informational needs while minimizing the costs and 
burdens on market participants. The proposed amendments retain the on-
demand reporting system, adopted in 1996, which costs market 
participants less than a regular reporting system would. Based on the 
very limited impact of the proposed amendments, it is our view that the 
proposed regulations are not a ``significant regulatory action'' for 
the purposes of Executive Order 12866.
    In addition, we certify under the Regulatory Flexibility Act (5 
U.S.C. 601, et seq.) that the proposed amendments to the current 
regulations, if adopted, would not have a significant economic impact 
on a substantial number of small entities. We continue to believe that 
small entities will not control positions of $2 billion or greater in 
any particular Treasury security. The inapplicability of the proposed 
amendments to small entities indicates there is no significant impact. 
As a result, a regulatory flexibility analysis is not required.
    The Paperwork Reduction Act of 1995 requires that collections of 
information prescribed in the proposed amendments be submitted to the 
Office of Management and Budget for review and approval.\14\ In 
accordance with that requirement, the Department has submitted the 
collection of information contained in this notice of proposed 
rulemaking for review. Under the Act, an agency may not conduct or 
sponsor, and a person is not required to respond to, a collection of 
information unless it displays a valid OMB control number. Comments on 
the collection of information may be submitted to the Office of 
Information and Regulatory Affairs, Office of Management and Budget, 
Attention: Desk Officer for Department of the Treasury, Washington, 
D.C., 20503; and to the Government Securities Regulations Staff, Bureau 
of the Public Debt, at the address specified at the beginning of this 
document.
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    \14\ 44 U.S.C. 3507(d).
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    The collection of information in the proposed amendments is 
contained in proposed Sec. 420.3. The rules at Sec. 420.3 continue to 
require a reporting entity whose position equals or exceeds the 
announced large position threshold for a specific issue of a Treasury 
security to report the information to FRBNY. Although we cannot be 
certain of the number of market participants that would be required to 
report their positions as a result of a call for such

[[Page 49633]]

reports, we believe few reporting entities would actually have to file 
reports because the minimum reporting threshold ($2 billion) remains 
high. In fact, the actual reporting threshold in a specific call for 
large position reports may exceed $2 billion. Moreover, we expect that 
our requests for information will be infrequent. We plan to continue 
testing the reporting and recordkeeping systems of market participants 
by requesting large position reports at least annually. The threshold 
limit will be determined based on market conditions at the time of the 
call.
    We do not believe that market participants would find the 
additional ``fails to deliver'' memorandum item burdensome since they 
already determine this figure when calculating their ``net fails 
position'' on line 3 of the existing large position report. The 
proposed ``fails to deliver'' memorandum item would simply be a place 
for reporting entities to record a previously derived number.
    We also do not anticipate that the proposed elimination of the 
voluntary optional exclusion within the ``gross financing position'' 
would be a significant inconvenience for market participants. It is 
unlikely that removing this exclusion from the large position 
calculation would increase the time burden that entities face when 
calculating their positions, although it might result in more entities 
filing large position reports. We are not certain how many potential 
respondents rely on this exclusion, and to what extent, however, this 
number would still be a subset of the small number of entities with 
positions large enough to be subject to the rules. We invite comments 
from market participants on the effect of this proposed change, 
including any operational or system modifications that may be needed.
    We believe the separate reporting of the ``net trading position'' 
components would not be very burdensome for market participants since 
they must already collect this information to calculate their net 
trading position. We also believe market participants would not find it 
very burdensome to separate their reporting of reverse repurchase 
agreements and repurchase agreements by maturity classification. Since 
the changes that are proposed would require more detailed information 
to be provided by reporting entities that file reports in response to a 
call for reports by Treasury, we are increasing the annual reporting 
burden in our submission to OMB by 40 hours, representing an increase 
from four to eight hours per large position report submitter.
    The collection of information is intended to enable the Treasury 
and other regulators to better understand the possible causes of market 
shortages in certain Treasury securities. This information would help 
ensure that the Treasury securities market remains liquid and 
efficient.
    Treasury invites further comments on: (1) Whether the proposed 
collection of information is necessary for the proper performance of 
functions of the Treasury, including whether the information has 
practical utility; (2) the accuracy of the Treasury's estimate of the 
burden; (3) enhancement of the quality, utility, and clarity of 
information to be collected; and (4) minimizing the burden of the 
collection of information on respondents, including through the use of 
automated collection techniques or other forms of information 
technology.
    Estimated total annual reporting burden: 40 hours.
    Estimated annual number of respondents: 10.
    Estimated annual frequency of response: On occasion.

List of Subjects in 17 CFR Part 420

    Foreign investments in U.S., Government securities, Investments, 
Reporting and recordkeeping requirements.
    For the reasons stated in the preamble, 17 CFR Part 420 is proposed 
to be amended as follows:

PART 420--LARGE POSITION REPORTING

    1. The authority citation for Part 420 continues to read as 
follows:

    Authority: 15 U.S.C. 78o-5(f).

    2. Section 420.2 is amended by revising paragraph (c) to read as 
follows:


Sec. 420.2  Definitions.

* * * * *
    (c) ``Gross financing position'' is the sum of the gross par 
amounts of a security issue received from financing transactions, 
including reverse repurchase agreement transactions, bonds borrowed, 
and as collateral for financial derivatives and other securities 
transactions (e.g., margin loans). In calculating the gross financing 
position, a reporting entity may not net its positions against 
repurchase agreement transactions, securities loaned, or securities 
pledged as collateral for financial derivatives and other securities 
transactions.
* * * * *
    3. Section 420.3 is amended by revising paragraphs (c)(1), (c)(2) 
and (c)(3) to read as follows:


Sec. 420.3  Reporting.

* * * * *
    (c)(1) In response to a notice issued under paragraph (a) of this 
section requesting large position information, a reporting entity with 
a reportable position that equals or exceeds the specified large 
position threshold stated in the notice shall compile and report the 
amounts of the reporting entity's reportable position in the order 
specified, as follows:
    (i) Net trading position, and each of the following items that 
together comprise the net trading position:
    (A) Cash/immediate net settled positions,
    (B) Net when-issued positions for to-be-issued and reopened issues,
    (C) Net forward settling positions, including next-day settling,
    (D) Net positions in futures contracts requiring delivery of the 
specific security, and
    (E) Net holdings of STRIPS principal components of the specific 
security;
    (ii) Gross financing position and each of the following items that 
comprise the gross financing position:
    (A) Securities received through reverse repurchase agreements by 
maturity classification:
    (1) Overnight and open, and
    (2) Term, and
    (B) Securities received through bonds borrowed, and as collateral 
for financial derivatives and other financial transactions.
    (iii) Net fails position; and
    (iv) Total reportable position.
    (2) The large position report must include the following two 
additional memorandum items:
    (i) The total gross par amounts of securities delivered through:
    (A) Repurchase agreements by maturity classification:
    (1) Overnight and open, and
    (2) Term, and
    (B) Securities loaned, and as collateral for financial derivatives 
and other securities transactions.
    (ii) The gross par amount of ``fails to deliver'' in the security. 
This total must also be included in Net Fails Position, Line 3.
    (3) An illustration of a sample report is contained in Appendix B. 
Each of the net trading position components shall be netted and 
reported as a positive number (long position), a negative number (short 
position), which should be shown in parenthesis, or zero (flat 
position). The total net trading position shall also be reported as the 
applicable positive or negative number (or zero). Each of the 
components of the gross financing position shall be reported. The total 
gross financing position,

[[Page 49634]]

which is the sum of the gross financing position components, shall also 
be reported. The net fails position should be reported as a single 
entry. If the amount of the net fails position is zero or less, report 
zero. The total reportable position, which is the sum of the net 
trading position, gross financing position, and net fails position, 
must be reported. Each component of Memorandum 1 shall be reported. The 
total of Memorandum 1, which is the sum of its components, shall also 
be reported. Memorandum 2, which is the gross par amount of fails to 
deliver, shall also be reported. All of these positions should be 
reported in the order specified above. All position amounts should be 
reported on a trade date basis and at par in millions of dollars.
* * * * *
    4. Appendix B to Part 420 Sample Large Position Report, ``Formula 
for Determining a Reportable Position,'' is revised to read as follows:

Appendix B to Part 420--Sample Large Position Report Formula for 
Determining a Reportable Position

          [$ Amounts in millions at par value as of trade date]
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                        1 ?????                              1 ?????
------------------------------------------------------------------------
Security Being Reported...............................        __________
Date For Which Information is Being Reported..........        __________
1. Net Trading Position:
    Cash/Immediate Net Settled Positions..............       $__________
    Net When-Issued Positions for To-Be-Issued and           $__________
     Reopened Issues..................................
    Net Forward Settling Positions Including Next-Day        $__________
     Settling.........................................
    Net Positions in Futures Contracts Requiring             $__________
     Delivery of the Specific Security................
    Net Holdings of STRIPS Principal Components of the       $__________
     Specific Security................................
        Total Net Trading Position....................       $__________
2. Gross Financing Position:
    Total of securities received through Reverse
     Repurchase Agreements:
        Overnight and Open............................       $__________
        Term..........................................       $__________
    Bonds borrowed, and as collateral for financial          $__________
     derivatives and other financial transactions.....
        Total Gross Financing Position................      +$__________
3. Net Fails Position.................................      +$__________
    (Fails to receive less fails to deliver. If equal
     to or less than zero, report 0.)
4.      Total Reportable Position.....................      =$__________
Memorandum 1
    Report the total gross par amounts of securities
     delivered through Repurchase Agreements:
        Overnight and Open............................       $__________
        Term..........................................       $__________
    Securities loaned, and as collateral for financial       $__________
     derivatives and other securities transactions....
        Total Memorandum 1............................       $__________
Memorandum 2
    Report the gross par amount of fails to deliver.         $__________
     Included in the calculation of line item 3 (Net
     Fails Position)..................................
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    Dated: July 24, 2002.
Brian C. Roseboro,
Assistant Secretary for Financial Markets.

[FR Doc. 02-19238 Filed 7-30-02; 8:45 am]
BILLING CODE 4810-39-P