[Federal Register Volume 67, Number 243 (Wednesday, December 18, 2002)]
[Rules and Regulations]
[Pages 77411-77416]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-31837]


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

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: Final rule.

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

SUMMARY: The Department of the Treasury (``Treasury,'' ``We,'' or 
``Us'') is

[[Page 77412]]

issuing in final form an amendment 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. With the exception of one minor 
clarification, we are adopting the changes as proposed. We believe the 
changes made to the rules by this amendment will improve the 
information available to Treasury. Specifically, the amendment modifies 
the report to require separate reporting of certain components of the 
``net trading position'' and the ``gross financing position.'' The 
amendment revises the current ``memorandum'' item to require that the 
par amount of securities delivered through repurchase agreements be 
separated by maturity classification. In addition, it adds a new 
memorandum item to the large position report to require that the gross 
par amount of ``fails to deliver'' be reported. Finally, the amendment 
also modifies the definition of ``gross financing position'' to 
eliminate the optional exclusion in the calculation of the amount of 
securities received through certain financing transactions.

EFFECTIVE DATE: This amendment is effective January 17, 2003.

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), 
Lee Grandy (Associate Director), or Kevin Hawkins (Government 
Securities Specialist), Bureau of the Public Debt, Government 
Securities Regulations Staff, (202) 691-3632 or e-mail us at 
[email protected].

SUPPLEMENTARY INFORMATION: We re-examined the ``large position rules'' 
\1\ and on July 31, 2002, published proposed amendments to the rules 
that would improve the information available to Treasury to better 
understand the causes of market shortages in certain Treasury 
securities. \2\ In this notice, we first provide background on the 
rules and why we are changing them. Next we discuss the public comments 
we received in response to the proposed rulemaking, and then we 
describe the final amendments. As explained below, we are adopting the 
proposed changes with one minor clarification.
---------------------------------------------------------------------------

    \1\ The rules were issued on September 12, 1996 (61 FR 48338) 
and were effective on March 31, 1997. They established a new part 
420 of the regulations issued by Treasury in 17 CFR, Chapter IV, 
Subchapter A, providing recordkeeping and reporting requirements 
related to very large positions in certain Treasury securities.
    \2\ 67 FR 49630 (July 31, 2002).
---------------------------------------------------------------------------

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 document) 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.
---------------------------------------------------------------------------

    \3\ Pub. L. No. 103-202, 107 Stat. 2344 (15 U.S.C. 78o-
5(f))(1993).
---------------------------------------------------------------------------

B. Reporting and Recordkeeping Requirements

    The rules provide for an ``on-demand'' reporting system rather than 
a regular, ongoing system of reporting.\4\ 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). 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 for notification of calls for large position reports that was 
implemented in 1998 is also available at Public Debt's website at the 
address provided earlier in this rule. This provides market 
participants with information about calls for large position reports in 
the most timely and efficient manner. 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.
---------------------------------------------------------------------------

    \4\ See supra note 1.
---------------------------------------------------------------------------

    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.\5\ All positions are required to be reported at par value on a 
trade date basis.
---------------------------------------------------------------------------

    \5\ 17 CFR 420.2(h).
---------------------------------------------------------------------------

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

    \6\ 17 CFR 420.4
---------------------------------------------------------------------------

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.\7\ 
The broad application of the rule to include both foreign and domestic 
entities is consistent with the statutory purpose of the GSAA.\8\
---------------------------------------------------------------------------

    \7\ 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). Federal Reserve Banks are also exempt for the 
portion of any reportable position they control for their own 
account.
    \8\ H.R. Rep. No. 103-255 (September 23, 1993).
---------------------------------------------------------------------------

    We 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. Proposed Rulemaking

    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

[[Page 77413]]

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, caused us to re-examine the rules and issue 
a proposed rulemaking on July 31, 2002.\9\ The modifications that were 
proposed reflected our continuing need for the ability to obtain useful 
information, while minimizing the costs and burdens on market 
participants.
---------------------------------------------------------------------------

    \9\ See supra note 2.
---------------------------------------------------------------------------

    The proposed rulemaking requested public comment on changes to the 
large position rules that would require:
    [sbull] Separate reporting of the par amount of each of the five 
components of the ``net trading position;''
    [sbull] Separate reporting of the total par amount of securities 
received through reverse repurchase agreements by maturity 
classification in the ``gross financing position'' (i.e., either 
``overnight and open'' or ``term'');
    [sbull] Separate reporting in the current memorandum item of the 
total par amount of securities delivered through repurchase agreements 
by maturity classification (i.e., either ``overnight and open'' or 
``term'');
    [sbull] Reporting of the amount of ``fails to deliver'' in a new 
memorandum item; and
    [sbull] Elimination of the optional exclusion in the calculation of 
the ``gross financing position'' for the amount of securities received 
through certain financing transactions.\10\
---------------------------------------------------------------------------

    \10\ Currently, Sec.  420.2(c) provides that a reporting entity 
may 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.
---------------------------------------------------------------------------

II. Comments Received in Response to the Proposed Rulemaking

    We received one comment letter in response to the proposed 
rulemaking, from The Bond Market Association (TBMA).\11\ Overall, TBMA 
was supportive of the proposed rule. The commenter noted that more 
detailed reporting of the net trading and gross financing positions 
would require many reporting entities to reconfigure their internal 
systems used to generate large position reports, thus increasing 
compliance costs. However, TBMA deemed the modifications appropriate 
because they should improve the depth of information available to 
Treasury and other regulators thereby enhancing transparency and 
enabling regulatory authorities to better understand the causes of 
market shortages of Treasury securities.''
---------------------------------------------------------------------------

    \11\ The proposed rule, and the comment letter, dated September 
16, 2002, are available for downloading on the Internet, and for 
inspection and copying at the Treasury Department Library at the 
address provided earlier in this final rule.
---------------------------------------------------------------------------

    TBMA suggested that we extend the current three and a half day 
reporting deadline to a full four business days. The commenter asserted 
that the broader reporting obligations could be ``unduly burdensome'' 
for entities that must consolidate information from global affiliates 
into a single report. The commenter also suggested that Treasury move 
the release time for the announcement of calls for large position 
reports to 8:00 a.m. (EST).
    As noted above, TBMA was supportive of requiring more detailed 
reporting of the gross financing position. However, TBMA urged 
``Treasury to clarify in the final rule that the specific maturity date 
for a term repo transaction does not need to be reported.''
    TBMA was fully supportive of eliminating the optional exclusion in 
the calculation of the gross financing position for certain 
transactions, including where the counterparty retains the right to 
substitute securities. The commenter stated that, ``The proposed change 
would create a simpler and more unambiguous rule,'' that would ``reduce 
compliance costs'' and ``ensure consistent treatment of overnight 
reverse repurchase transactions and term repurchase transactions where 
the counterparty retains a technical right of substitution.''

III. Amendment to the Rule

    After considering the one comment letter received, we are adopting 
the amendment essentially as proposed with a clarification recommended 
by the commenter. As recommended, we are clarifying in the rule 
amendment our intention that specific maturity dates for term 
repurchase agreements and term reverse repurchase agreements not be 
reported. That means that only the total dollar amount of the 
outstanding contracts for term repurchase agreements and term reverse 
repurchase agreements, respectively, are to be reported.
    Accordingly, Sec.  420.3(c)(1) and (c)(3), and Appendix B are 
revised to require that each of the five components in Sec.  
420.2(f)(1)-(5) that, together, comprise the ``net trading position,'' 
to be reported separately. As we stated in the proposed rulemaking, 
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 very burdensome.
    Section 420.3(c)(1) and (c)(3), and Appendix B are revised 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'') in 
the reporting of the gross financing position. Similarly, the current 
memorandum item is revised to require that the total gross par amounts 
of securities delivered through repurchase agreements be reported by 
maturity classification. As previously discussed, a clarification has 
been added that only the total dollar amount of term reverse repurchase 
agreements and term repurchase agreements, respectively, is to be 
reported. We believe the separate reporting of these individual 
components in the large position formula, as well as the separation of 
reverse repurchase agreements and repurchase agreements by maturity 
classification, will help us to better understand the reporting 
entity's degree of control and economic interest in the particular 
security.
    Section 420.3(c)(2) and Appendix B are revised to add a second 
memorandum item to the large position information for the gross par 
amount of ``fails to deliver.'' This will 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.
    Finally, the definition of ``gross financing position'' is revised 
at Sec.  420.2(c) to eliminate in its entirety the optional exclusion 
for certain securities received through financing transactions. A 
conforming change is also 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. This means that a 
reporting entity may no longer 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. We believe this change will enhance the 
usefulness of the large position reports to regulators. We agree with 
the commenter that this change will result in a simpler and more 
unambiguous rule.
    Regarding the commenter's request that Treasury extend the current 
three and one-half day reporting deadline to a full four days, and also 
that Treasury move the release time for the announcement of calls for 
large position reports to 8 a.m. EST, we have decided

[[Page 77414]]

not to change the current rule. We have given consideration to this 
comment and are sympathetic to market participants' concerns regarding 
the time needed for some reporting entities to coordinate with overseas 
affiliates, aggregate position totals and file a single consolidated 
large position report. However, to be balanced against these concerns 
is the need for reports to be filed quickly in order to accomplish the 
purpose of the rules. If unusual market conditions or a pricing anomaly 
exist, we believe three and one-half days is a significant amount of 
time for regulators to wait for the reports that will enable us to make 
better and more timely decisions to ensure the integrity, liquidity and 
efficiency of the Treasury market. Also, although we will attempt to 
release announcements of large position calls in the morning when 
possible, Treasury must retain the flexibility to announce a call at 
any time of the day due to market developments and our need to quickly 
obtain information on market shortages. Market participants with very 
large positions should be prepared for an announcement of a call for 
large position reports at any time.
    We believe the notification of calls for large position reports e-
mail list that has been available at Public Debt's Web site since 1998 
has provided a valuable electronic service. Anyone signing up is 
promptly notified anytime Treasury announces a call for large position 
reports, with a link provided in the e-mail message to the actual Press 
Release announcing the call. We understand that market participants, 
including many affiliates, have found that this enhanced system for 
dissemination of call announcements has been very useful in providing 
them with the call information in a more timely and efficient manner.
    To allow market participants sufficient time to make necessary 
preparations for compliance, we are providing for a 30-day delayed 
effective date from the date of publication in the Federal Register of 
the amendment to the rules.

IV. Special Analysis

    The regulations are not a ``significant regulatory action'' 
pursuant to Executive Order 12866.
    We certify under the Regulatory Flexibility Act (5 U.S.C. 601, et 
seq.) that these amendments, 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 
these amendments to small entities indicates there is no significant 
impact. As a result, a regulatory flexibility analysis is not required.
    The collections of information contained in the final amendments 
have been reviewed and approved by the Office of Management and Budget 
pursuant to the Paperwork Reduction Act of 1995.\12\ 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.
---------------------------------------------------------------------------

    \12\ 44 U.S.C. 3507(d).
---------------------------------------------------------------------------

    The collection of information in the final amendments is contained 
in 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. We believe few reporting entities 
would actually have to file reports because the minimum reporting 
threshold ($2 billion) remains high. 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 ``fails 
to deliver'' memorandum item is simply a place for reporting entities 
to record a previously derived number.
    We also do not anticipate that the 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 may result in more entities filing large 
position reports.
    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 taking effect require more detailed information to be 
provided by reporting entities that file reports in response to a call 
for reports by Treasury, we increased 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.
    Estimated total annual reporting burden: 40 hours.
    Estimated annual number of respondents: 10.
    Estimated annual frequency of response: On occasion.
    Comments on the accuracy of the estimate for this collection of 
information or suggestions to reduce the burden should be sent to the 
Office of Information and Regulatory Affairs, Office of Management and 
Budget, Attention: Desk Officer for Department of the Treasury, 
Washington, DC, 20503; and to the Government Securities Regulations 
Staff, Bureau of the Public Debt, 999 E Street, NW., Room 315, 
Washington, DC 20239-0001.

List of Subjects in 17 CFR Part 420

    Banks and banking, Government securities, Investments, Reporting 
and recordkeeping requirements.

    For the reasons stated in the preamble, 17 CFR part 420 is 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

[[Page 77415]]

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 (report the total dollar amount of the outstanding 
contracts, summing across maturity dates), 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 (report the total dollar amount of the outstanding 
contracts, summing across maturity dates), 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, 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]
------------------------------------------------------------------------
 
------------------------------------------------------------------------
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.
                                     ===================================
                                     -----------------------------------
(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....
                                     -----------------------------------

[[Page 77416]]

 
                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)...........
------------------------------------------------------------------------


    Dated: December 6, 2002.
Brian C. Roseboro,
Assistant Secretary for Financial Markets.
[FR Doc. 02-31837 Filed 12-17-02; 8:45 am]
BILLING CODE 4810-39-P