[Federal Register Volume 67, Number 218 (Tuesday, November 12, 2002)]
[Rules and Regulations]
[Pages 68513-68517]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-28662]


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

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: Final rule.

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

SUMMARY: The Department of the Treasury (``Treasury,'' ``We,'' or 
``Us'') is issuing in final form an amendment to the regulation 
``Uniform Offering Circular for the Sale and Issue of Marketable Book-
Entry Treasury Bills, Notes, and Bonds.'' This amendment modifies the 
net long position (``NLP'') reporting threshold for all Treasury 
marketable securities auctions. The threshold, currently $1 billion for 
Treasury bill auctions and $2 billion for Treasury note auctions, is 
being changed to 35 percent of the offering amount in each auction. 
This modification will reduce the number of auction bidders that are 
required to report their NLPs, while ensuring that we can still 
effectively administer the 35 percent award limit.
    The amendment also incorporates certain changes in Treasury's 
marketable securities auction program that have already been 
implemented. First, the amendment modifies the competitive bid format 
for auctions of Treasury cash management bills to conform to a policy 
change that was made in April 2002. The current two-decimal bid format 
is being changed to three decimals in .005 percent increments, which is 
the format in all other Treasury bill auctions.
    Second, the amendment makes several changes to reflect the current 
treatment in all Treasury marketable securities auctions of bids from 
Federal Reserve Banks for their own accounts and for the accounts of 
foreign and international monetary authorities. Specifically, the 
amendment deletes the defined term ``public offering,'' adds ``offering 
amount'' as a new defined term, revises the definition of ``bid-to-
cover ratio,'' and makes conforming changes within the text of the 
Uniform Offering Circular. These changes make the terminology 
consistent between the Uniform Offering Circular and auction offering 
announcements.

EFFECTIVE DATE: December 12, 2002.

ADDRESSES: You may download this final rule from the Bureau of the 
Public Debt's Web site 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, 
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,

[[Page 68514]]

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 to the public of 
marketable Treasury bills, notes, and bonds.\1\ In this document, we 
provide some background on the NLP and its reporting requirements. Next 
we discuss the public comments we received in response to an Advance 
Notice of Proposed Rulemaking (``ANPR'') regarding NLP reporting, 
published on April 29, 2002.\2\ We then describe the final amendment.
---------------------------------------------------------------------------

    \1\ The Uniform Offering Circular was published as a final rule 
on January 5, 1993 (58 FR 412). The Uniform Offering Circular, as 
amended, is codified at 31 CFR Part 356.
    \2\ 67 FR 20934 (April 29, 2002).
---------------------------------------------------------------------------

I. Background on Net Long Position Reporting

    One of the requirements of the Treasury auction process is the 
reporting of NLPs, which we use to limit the amount that we will award 
to any one bidder in an auction (``the 35 percent rule''). 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.
    A bidder in an auction must report its NLP if, in the security 
being auctioned, the bidder's NLP plus its bids in the auction meet or 
exceed a certain dollar-amount threshold as stated in the security's 
offering announcement. The NLP reporting threshold currently is $1 
billion for Treasury bills and $2 billion for Treasury notes. In 
addition, if the sum of a bidder's bids equals or exceeds the NLP 
reporting threshold, but the bidder has no position or has a net short 
position, it must report an NLP of zero. A bidder must determine its 
NLP as of one-half hour prior to the deadline for receipt of 
competitive bids. If a bidder meets or exceeds the reporting threshold 
as of the NLP determination time in the auction offering announcement, 
the bidder must report its NLP prior to the competitive bidding 
deadline.
    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 components of the NLP are intended 
to capture the various ways that a bidder can acquire a Treasury 
security.\3\ 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.
---------------------------------------------------------------------------

    \3\ See 31 CFR 356.13(b) for details on the components of the 
NLP. See also the amendment to the Uniform Offering Circular 
published on November 13, 2001 (66 FR 56759), which provided an 
optional exclusion amount in the NLP calculation for reopenings.
---------------------------------------------------------------------------

    We published an ANPR for public comment on April 29, 2002,\4\ to 
solicit comments on four alternatives for addressing the half-hour time 
lag between the time as of which the NLP is calculated (the ``NLP as-of 
time'') and the competitive bidding deadline. It was pointed out in the 
ANPR that, 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 award 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. We also stated in the ANPR that we were more fundamentally 
reconsidering the rule. In addition, we invited comments on potential 
changes to the NLP reporting threshold amount, and indicated that we 
were considering changes in this area regardless of whether or not we 
implement any modifications to the NLP as-of reporting timeframes.
---------------------------------------------------------------------------

    \4\ See supra, note 2.
---------------------------------------------------------------------------

    The four alternatives were as follows:
    Alternative 1: Reduce the half-hour interval between the NLP as-of 
time and the competitive bidding deadline.
    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.
    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 \5\ and other mechanisms to monitor the 
market and address concentrations of ownership.
---------------------------------------------------------------------------

    \5\ 17 CFR 420.
---------------------------------------------------------------------------

    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. Regarding this 
potential change, we stated in the ANPR that we are considering 
changing the NLP reporting threshold from $1 billion for Treasury bills 
and $2 billion for Treasury notes to the actual 35 percent award limit 
for each auction. This rule change would apply to all marketable 
Treasury securities auctions. We also stated that we would provide the 
35 percent award limit on the auction offering announcement in each 
auction. 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 
do 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.

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

    We received one comment in response to the ANPR, which was from The 
Bond Market Association (TBMA).\6\ The commenter recommended that we 
make three changes to the NLP rules.
---------------------------------------------------------------------------

    \6\ The ANPR and comment letter, dated June 27, 2002, 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.
---------------------------------------------------------------------------

    First, TBMA supported Alternative 1 by advocating reducing the 
half-hour interval between the NLP as-of time and the competitive 
bidding deadline. Specifically, the commenter suggested requiring 
bidders to calculate their NLPs as of 12:40 p.m. rather than 12:30 p.m. 
TBMA stated that this modification would take advantage of 
technological advances by dealers while still ensuring the accuracy of 
submitted bids and NLPs. The commenter pointed out a disadvantage of 
this alternative, which is, ``Because auction support staff will have 
less time to work with, there is certainly the possibility that 
Treasury

[[Page 68515]]

may initially see a small spike in the number of NLP submission 
errors.'' The commenter opposed providing bidders with less than 20 
minutes to determine, verify and report their NLPs, primarily because 
``moving the time up further would put substantial strain on existing 
personnel,'' particularly for those securities dealers with numerous 
domestic and foreign affiliates.
    Second, TBMA strongly supported modifying the NLP reporting 
thresholds for bill and note auctions to 35 percent of the issuance 
amount, because it would ``better capture only those bidders that are 
most likely to exceed the 35 percent limit.'' The commenter maintained 
that the current reporting thresholds are ``unnecessarily low'' and 
that, ``Any benefit Treasury derives from maintaining a low reporting 
threshold is outweighed by the additional bidder submission errors that 
result.''
    Third, TBMA recommended that we discontinue requiring bidders to 
report a zero NLP when their bids equal or exceed the applicable 
reporting threshold but they have either no net long position or a net 
short position. The commenter advocated that such bidders be given the 
choice of either reporting a zero NLP or leaving the field blank. TBMA 
acknowledged that, ``requiring bidders to report their negative NLP as 
zero does theoretically act as a check that a bidder realized that it 
was over the threshold.'' However, TBMA asserted that inadvertent 
failures by bidders to report a zero have resulted in ``serious 
violation letters'' from Treasury, where in fact such instances are ``a 
technical violation of the auction rules that in no way could have 
impacted the results of the auction.''
    In addition to the modifications it favored, TBMA also advised 
against adopting either Alternative 2 or 3. In particular, TBMA argued 
against post-auction reporting of NLPs (Alternative 2), primarily 
because it would discourage aggressive bidding since ``large bidders 
would have to allow themselves a substantial `margin for error' with 
respect to the 35 percent rule.''

III. Amendment to the Rule

Net Long Position Reporting Threshold

    After considering the comment letter we received, we are modifying 
the NLP reporting threshold to 35 percent of the offering amount in 
each auction. We agree with the commenter that this change will more 
precisely apply only to those bidders whose bids are most likely to 
equal or exceed the 35 percent award limit in an auction. Accordingly, 
Sec.  356.13(a) is revised to reflect that the net long position 
reporting threshold amount will be 35 percent of the offering amount. 
The NLP reporting threshold will be provided on the offering 
announcement for each auction.
    We are not considering any other changes to the NLP reporting 
requirement at this time. The NLP as-of reporting time will continue to 
be one half-hour prior to the deadline for receiving competitive bids. 
We agree with TBMA that shortening this time interval could result in 
an increase in NLP reporting errors. Since shortening the time interval 
to 20 minutes would still leave a significant time period in which 
bidders' positions in the securities being auctioned could change 
significantly prior to the deadline for receiving competitive bids, we 
believe that the disadvantages of a likely increase in NLP reporting 
errors outweigh the benefits of a shorter time period for calculating 
and reporting NLPs.
    We also have decided to maintain the requirement for bidders to 
report an NLP of zero when their bids equal or exceed the applicable 
reporting threshold but they have either no net long position or a net 
short position. We believe that this requirement acts as an important 
check to ensure that bidders with very large bids in an auction 
calculated their NLPs for possible reporting in the auction.

Conforming Technical Changes

    We are also making a conforming technical change to Sec.  
356.12(c)(1)(i) of the auction rules to reflect that competitive bids 
in all cash management bill auctions must now be expressed as a 
discount rate with three decimals in increments of .005 percent, for 
example, 3.100%, 3.105%.\7\ This change will make the competitive bid 
format for cash management bills the same as for all other types of 
Treasury bills. This change will enable competitive bidders to better 
fine-tune their bids in cash management bill auctions.
---------------------------------------------------------------------------

    \7\ Treasury announced this policy change in a Press Release 
dated April 2, 2002, that announced several offerings of cash 
management bills. Subsequent cash management bill offering 
announcements also stated this bidding requirement. The offering 
announcement governs in cases where it is inconsistent with the 
Uniform Offering Circular. (See Sec.  356.10)
---------------------------------------------------------------------------

    We are deleting from Sec.  356.12 the defined term ``public 
offering'' and adding the defined term ``offering amount.'' In the 
past, ``public offering'' had a different meaning from ``offering 
amount'' as used on the offering announcement because of the treatment 
of amounts bid by the Federal Reserve's System Open Market Account 
(SOMA) and by foreign and international monetary authorities (FIMA). In 
March 1997, Treasury announced that awards to SOMA in Treasury bill 
auctions would be treated as additions to the announced offering 
amount, the same treatment as for note and bond auctions.\8\ Since 
February 2001, when specific noncompetitive bidding and award 
limitations were placed on FIMA accounts,\9\ awards to FIMA accounts 
are made within the offering amount, as are those to the public in 
general. Since these changes, the treatment of FIMA and SOMA is 
consistent for all Treasury securities auctions. Awards to SOMA are 
made in addition to the offering amount; FIMA awards are within the 
offering amount.
---------------------------------------------------------------------------

    \8\ Treasury Press Release dated March 18, 1997.
    \9\ The policy change was announced in a Treasury Press Release 
dated November 14, 2000, and became effective on February 1, 2001.
---------------------------------------------------------------------------

    The definition of ``public offering'' in Sec.  356.2 is no longer 
accurate to the extent that the definition continues to exclude FIMA 
bids up to the amount of maturing securities in those accounts. Since 
there is no longer any difference in the meaning of ``public offering'' 
and ``offering amount,'' and the offering announcements use the term 
``offering amount,'' we are deleting the term ``public offering'' and 
adding the term ``offering amount'' to the Uniform Offering Circular, 
and making conforming changes within the text. One of these conforming 
changes is to the definition of ``bid-to-cover ratio,'' which 
previously excluded both SOMA and FIMA bids and awards, and now only 
excludes SOMA bids and awards.
    Finally, this amendment incorporates technical changes in 
Sec. Sec.  356.20 and 356.21 to conform to our policy for prorating 
competitive bids at the highest accepted yield or discount rate. In the 
weekly bill auctions of April 30, 2001, we changed the rounding 
convention for the allocation percentage from rounding up to the next 
whole percentage point to rounding up to the next hundredth of a whole 
percentage point.

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 April 29, 2002, 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

[[Page 68516]]

of the Regulatory Flexibility Act (5 U.S.C. 601 et seq.) do not apply.
    The collections of information in this final rule amendment have 
been previously approved by the Office of Management and Budget in 
accordance with the Paperwork Reduction Act of 1995. This final rule is 
technical in nature and imposes no additional burdens on auction 
bidders.

List of Subjects in 31 CFR Part 356

    Bonds, Federal Reserve System, Government securities, Securities.

    For the reasons stated in the preamble, 31 CFR Part 356 is amended 
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 356.2 is amended by removing the definition of ``Public 
offering,'' revising the definition of ``Bid-to-cover ratio,'' and 
adding the defined term ``Offering amount'' between the defined terms 
``Noncompetitive bid'' and ``Par'' to read as follows:


Sec.  356.2  Definitions.

* * * * *
    Bid-to-cover ratio means the total par amount of securities bid for 
by the public divided by the total par amount of securities awarded to 
the public. The bid-to-cover ratio excludes any bids or awards for the 
account of the Federal Reserve Banks.
* * * * *
    Offering amount means the par amount of securities offered to the 
public for purchase in an auction, as specified in the offering 
announcement.
* * * * *

    3. Section 356.12 is amended by revising paragraphs (c)(1)(i) and 
(c)(2) to read as follows:


Sec.  356.12  Noncompetitive and competitive bidding.

* * * * *
    (c) Competitive. * * *
    (1) Bid format--(i) Treasury bills. A competitive bid must show the 
discount rate bid, expressed with three decimals in .005 percent 
increments. The third decimal must be either a zero or a five, e.g., 
5.320 or 5.325. Fractions may not be used.
* * * * *
    (2) Maximum recognized bid. There is no limitation on the maximum 
dollar amount that a bidder may bid for competitively, either at one 
yield or discount rate, or at different yields or discount rates. 
However, a competitive bid at a single yield or discount rate that 
exceeds 35 percent of the offering amount will be reduced to that 
amount. For example, if the offering amount is $10 billion, the maximum 
bid amount that will be recognized at any one yield or discount rate 
from any bidder is $3.5 billion. (See Sec.  356.22 for award 
limitations.)

    4. Section 356.13 is amended by revising paragraph (a) to read as 
follows:


Sec.  356.13  Net long position.

    (a) Reporting net long positions. When bidding competitively, a 
bidder must report the amount of its net long position when the total 
of all of its bids in an auction plus the bidder's net long position in 
the security being auctioned equals or exceeds the net long position 
reporting threshold amount. The net long position reporting threshold 
amount for any particular security will be stated in the offering 
announcement for that security. (See Sec.  356.10.) That amount will be 
35 percent of the offering amount, unless otherwise stated in the 
offering announcement. If the bidder either has no position or has a 
net short position and the total of all of its bids equals or exceeds 
the net long position reporting threshold amount, a net long position 
of zero must be reported. In cases where a bidder that is required to 
report the amount of its net long position has more than one bid, the 
bidder's total net long position should be reported in connection with 
only one bid. A bidder that is a customer must report its reportable 
net long position through only one depository institution or dealer. 
(See Sec.  356.14(c).)
* * * * *

    5. Section 356.20 is amended by revising paragraph (a) to read as 
follows:


Sec.  356.20  Determination of auction awards.

    (a) Determining the range and amount of accepted competitive bids--
(1) Accepting bids. Determinations of awards in auctions are made after 
the closing time for receipt of bids. In determining auction awards, 
all noncompetitive bids received by the closing time specified in the 
offering announcement are accepted in full. Then competitive bids are 
accepted, starting with those at the lowest yields or discount rates 
through successively higher yields or discount rates, up to the amount 
required to meet the offering amount. Bids at the highest accepted 
yield or discount rate will be prorated (as described in paragraph 
(a)(2) of this section), if necessary. If the amount of noncompetitive 
bids would absorb most or all of the offering amount, competitive bids 
will be accepted in an amount determined by Treasury to be sufficient 
to provide a fair determination of the yield or discount rate for the 
securities being auctioned.
    (2) Accepting bids at the high yield or discount rate. When the 
total amount of bids at the highest accepted yield or discount rate 
exceeds the amount of the offering amount remaining after acceptance of 
noncompetitive bids and competitive bids at the lower yields or 
discount rates, a percentage of the bids received at the highest 
accepted yield or discount rate will be awarded. This proration is 
performed for the purpose of awarding a par amount of securities close 
to the offering amount. The percentage is derived by dividing the 
remaining par amount needed to fill the offering amount by the par 
amount of the bids recognized at the high yield or rate and rounding up 
to the next hundredth of a whole percentage point, for example, 17.13%.
* * * * *

    6. Section 356.21 is amended by revising paragraph (a) and the 
second sentence of paragraph (b) to read as follows:


Sec.  356.21  Proration of awards.

    (a) Awards to submitters. In auctions where bids at the highest 
accepted yield or discount rate are prorated under Sec.  356.20(a)(2) 
of this part, the Federal Reserve Banks are responsible for prorating 
awards for submitters at the percentage announced by the Department. 
For example, if 80.15% is the announced percentage at the highest yield 
or discount rate, then each bid at that rate or yield shall be awarded 
80.15% of the amount bid. Hence, a bid for $100,000,000 at the highest 
accepted yield or discount rate would be awarded $80,150,000. In all 
cases, awards will be for at least the minimum to hold, and awards must 
be in an appropriate multiple to hold. Awards at the highest accepted 
yield or rate are adjusted upwards, if necessary, to an appropriate 
multiple to hold. For example, Treasury bills may be issued with a 
minimum to hold of $1,000 and multiples of $1,000. Where an $18,000 bid 
is accepted at the high discount rate, and the percent awarded at the 
high discount rate is 88.27%, the award to that bidder will be $16,000, 
representing an upward adjustment from $15,888.60 ($18,000 x .8827) to 
an appropriate multiple to hold. If tenders at the

[[Page 68517]]

highest accepted discount rate are prorated at, for example, a rate of 
4.65%, the award for a $10,000 bid will be $1,000, instead of $465, in 
order to meet the minimum to hold for a bill issue.
    (b) Awards to customers.* * * For example, if 80.15% is the 
announced percentage at the highest yield or discount rate, then each 
customer bid at that rate or yield shall be awarded 80.15%.* * *

    7. Section 356.22 is amended by revising paragraph (b) to read as 
follows:


Sec.  356.22  Limitation on auction awards.

* * * * *
    (b) Awards to competitive bidders. The maximum award that will be 
made to any bidder is 35 percent of the offering amount less the 
bidder's net long position as reportable under Sec.  356.13. For 
example, in a note auction with a $10 billion offering amount, a bidder 
with a reported net long position of $1 billion could receive a maximum 
auction award of $2.5 billion. When the bids and net long positions of 
more than one person or entity must be combined as required by Sec.  
356.15(c), such combined amount will be used for the purpose of this 
award limitation.

    Dated: November 5, 2002.
Donald V. Hammond,
Fiscal Assistant Secretary.
[FR Doc. 02-28662 Filed 11-8-02; 8:45 am]
BILLING CODE 4810-39-P