[Federal Register Volume 69, Number 189 (Thursday, September 30, 2004)]
[Proposed Rules]
[Pages 58756-58766]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-21909]



[[Page 58755]]

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Part IV





Department of the Treasury





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Fiscal Service



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31 CFR Part 344



U.S. Treasury Securities--State and Local Government Series; Proposed 
Rule

  Federal Register / Vol. 69, No. 189 / Thursday, September 30, 2004 / 
Proposed Rules  

[[Page 58756]]


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DEPARTMENT OF THE TREASURY

Fiscal Service

31 CFR Part 344

[Department of the Treasury Circular, Public Debt Series No. 3-72]


U.S. Treasury Securities--State and Local Government Series

AGENCY: Bureau of the Public Debt, Fiscal Service, Treasury.

ACTION: Notice of proposed rulemaking with request for comments.

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SUMMARY: The Department of the Treasury (Treasury) is issuing this 
Notice of Proposed Rulemaking (NPRM) to revise the regulations 
governing State and Local Government Series (SLGS) securities. SLGS 
securities are non-marketable Treasury securities that are only 
available for purchase by issuers of tax-exempt securities. The NPRM 
deals with certain practices of issuers that in effect use the SLGS 
program as a cost-free option and which Treasury considers to be 
contrary to the purpose of the SLGS program. These practices also 
create volatility in Treasury's cash balances, make cash balance 
forecasting more difficult, and increase Treasury's borrowing costs. We 
are proposing changes to eliminate these practices. We are also 
proposing other changes that are designed to improve the administration 
of the SLGS program.

DATES: To be considered, comments must be received on or before 
November 1, 2004.

ADDRESSES: You may submit comments, identified by Docket Number BPD-02-
04, by any of the following methods:
     Federal eRulemaking Portal: <http://www.regulations.gov>. 
Follow the instructions for submitting comments.
     Agency Web Site: <http://www.publicdebt.treas.gov>. Follow 
the instructions for submitting comments via e-mail to <[email protected]>.
     E-mail: <[email protected]>. Include Docket Number 
BPD-02-04 in the subject line of the message.
     Fax: 304-480-5277.
     Mail: Keith Rake, Deputy Assistant Commissioner, Bureau of 
the Public Debt, Department of the Treasury, P.O. Box 396, Parkersburg, 
WV 26101-0396, or Edward Gronseth, Deputy Chief Counsel, Elizabeth 
Spears, Senior Attorney, or Brian Metz, Attorney-Adviser, Office of the 
Chief Counsel, Bureau of the Public Debt, Department of the Treasury, 
P.O. Box 1328, Parkersburg, WV 26106-1328.
     Hand Delivery/Courier: Keith Rake, Deputy Assistant 
Commissioner, Office of the Assistant Commissioner, Bureau of the 
Public Debt, Department of the Treasury, 200 3rd St., Parkersburg, WV 
26101, or Edward Gronseth, Deputy Chief Counsel, Elizabeth Spears, 
Senior Attorney, or Brian Metz, Attorney-Adviser, Office of the Chief 
Counsel, Bureau of the Public Debt, Department of the Treasury, 200 3rd 
St., Parkersburg, WV 26101.
    Instructions: All submissions received must be addressed to the 
Bureau of the Public Debt and include the Docket Number for this NPRM, 
BPD-02-04. All comments received will be posted without change to 
<http://www.publicdebt.treas.gov>. The posting will include any 
personal information that you provide in the submission.

FOR FURTHER INFORMATION CONTACT: Keith Rake, Deputy Assistant 
Commissioner, Office of the Assistant Commissioner, Bureau of the 
Public Debt, 200 3rd St., P.O. Box 396, Parkersburg, WV 26106-0396, 
(304) 480-5101, or by e-mail at <[email protected]> or Edward 
Gronseth, Deputy Chief Counsel, Elizabeth Spears, Senior Attorney, or 
Brian Metz, Attorney-Adviser, Office of the Chief Counsel, Bureau of 
the Public Debt, Department of the Treasury, P.O. Box 1328, 
Parkersburg, WV 26106-1328.

SUPPLEMENTARY INFORMATION:

I. Practices and Regulatory Proposals

    Treasury offers SLGS securities to issuers of tax-exempt 
securities. The purpose of the SLGS program is to assist state and 
local government issuers in complying with yield restriction and rebate 
requirements applicable to tax-exempt securities under the Internal 
Revenue Code.
    In 1996, Treasury revised the regulations governing SLGS securities 
to make the program a more flexible and competitive investment vehicle 
for issuers in a manner that was intended to be cost effective. 61 FR 
55690 (October 28, 1996). The regulations were revised to eliminate a 
number of requirements, including a requirement that issuers provide 
certain certifications as a condition to purchasing SLGS securities. In 
addition, the regulations were changed to permit an issuer to subscribe 
for SLGS securities and subsequently cancel the subscription, without a 
monetary penalty, under certain circumstances.
    In 1997, Treasury amended the regulations to clarify that certain 
transactions in which issuers use SLGS securities to provide a cost-
free interest rate hedge or option are prohibited. 62 FR 46444 
(September 3, 1997). A new provision was added (current Sec.  
344.2(f)(1), (f)(2)) to the effect that it is impermissible to 
subscribe for SLGS securities for deposit in a defeasance escrow or 
fund if (1) the amount of SLGS securities subscribed for, plus the 
securities already in the escrow or fund, plus the amount the issuer 
has acquired or has a right to acquire for deposit in the escrow or 
fund, exceeds the total amount of securities needed to fund such escrow 
or fund and (2) the securities in the escrow or fund are subject to an 
agreement conditioned on changes in the interest rate on open market 
Treasury securities. Examples of acceptable and unacceptable practices 
were also provided (current Sec.  344.2(f)(2)).
    Treasury noted that the prices established for SLGS securities do 
not include the cost of an option. Treasury considered whether it would 
be consistent with the purposes of the SLGS securities program to allow 
SLGS securities to serve as options if Treasury were appropriately 
compensated and second, if the answer to the first question is 
affirmative, whether there is a practical way for the Department to 
charge for the use of SLGS securities as options. Neither question was 
answered at that time. Treasury stated that unless it determines that 
it would be both advisable and practical to allow SLGS securities to 
serve as options if Treasury is appropriately compensated, the use of 
SLGS securities for such purpose would continue to be an inappropriate 
use of the SLGS program. We have determined at this time that it would 
not be practical to price options.
    Treasury has recently become aware of several other practices 
involving SLGS securities that are also inappropriate uses of the 
securities and contrary to the purpose of the program. Many of these 
practices are variations on the use of SLGS securities as some form of 
a cost-free option. These practices also result in volatility in 
Treasury's cash balances and make cash-balance forecasting more 
difficult. Cash balance volatility creates uncertainty in the amount of 
marketable Treasury securities Treasury needs to issue and results in 
increased borrowing costs. These practices also result in higher 
administrative costs for Treasury.

A. Redemptions Before Maturity

    Certain participants in the municipal bond market have noted that 
the early determination of SLGS rates and movements in market prices 
create arbitrage opportunities. Many arbitrage transactions have been 
undertaken as escrow restructurings (including redemptions of SLGS 
securities to reinvest in SLGS securities or

[[Page 58757]]

marketable securities at a higher yield), to eliminate ``negative 
arbitrage.'' Negative arbitrage occurs when bond proceeds are invested 
at a yield that is less than the yield on the issuer's bond, often as a 
result of market conditions where the maximum SLGS rates available are 
lower than what would be permissible under the arbitrage requirements. 
Under the current regulations, such restructuring transactions to 
reinvest at a higher yield generally are not prohibited.
    Treasury has concluded, however, that the practice of requesting 
redemption of SLGS securities before maturity to take advantage of 
relatively infrequent SLGS pricing is an inappropriate use of SLGS 
securities. Even if undertaken to eliminate negative arbitrage, 
Treasury considers this practice to be a cost-free option and 
inconsistent with the purpose of the program. There is a direct cost to 
Treasury in that Treasury is not being compensated for the value of the 
option. This practice also results in volatility in Treasury's cash 
balances and increases the difficulty of cash balance forecasting and 
thereby increases Treasury's borrowing costs. All redemptions before 
maturity also create administrative costs.
    In this NPRM, we propose several changes to eliminate this practice 
and similar practices.
    First, for SLGS securities subscribed for on or after the date of 
publication of the final rule, it would be impermissible to invest any 
amount received from the redemption before maturity of a SLGS Time 
Deposit security at a yield that exceeds the yield used to determine 
the amount of redemption proceeds for such Time Deposit security. It 
would also be impermissible to purchase a SLGS security with any amount 
received from the sale or redemption (at the option of the holder) 
before maturity of any marketable security, if the yield on such SLGS 
security being purchased exceeds the yield at which such marketable 
security is sold or redeemed. These impermissible practices would be 
added to Sec.  344.2(f)(1), with conforming changes to the examples in 
proposed Sec.  344.2(f)(2)(ii) and (iii).
    In addition, as set forth in proposed Sec.  344.2(e)(3)(i), upon 
starting a subscription for a SLGS security, a subscriber would be 
required to certify that: (A) If the issuer is purchasing a SLGS 
security with the proceeds of the sale or redemption (at the option of 
the holder) before maturity of any marketable security, the yield on 
such SLGS security does not exceed the yield at which such marketable 
security was sold or redeemed; and (B) if the issuer is purchasing a 
SLGS security with proceeds of the redemption before maturity of a Time 
Deposit security, the yield on the SLGS security being purchased does 
not exceed the yield used to determine the amount of redemption 
proceeds for such redeemed Time Deposit security.
    Upon submission of a request for redemption before maturity of a 
Time Deposit security, the issuer would be required to certify that no 
amount received from the redemption will be invested at a yield that 
exceeds the yield used to determine the amount of redemption proceeds 
for such Time Deposit security. Sec.  344.2(e)(3)(ii).
    These certifications would be made electronically through SLGSafe 
(Treasury's web-based service through which subscribers submit SLGS 
securities transactions). SLGSafe is administered by the Bureau of the 
Public Debt (BPD).
    We are proposing a definition of ``yield'' in Sec.  344.1 that 
would apply to the certifications. The definition would require that, 
in comparing the yield of a SLGS security to the yield of a marketable 
debt instrument, the yield of the marketable debt instrument would be 
computed using the same compounding intervals and financial conventions 
used to compute interest on the SLGS security. The certifications do 
not contemplate any adjustment for credit quality in determining yield 
in the event that the marketable securities are other than U.S. 
Treasury securities (e.g., securities of a government-sponsored 
enterprise). We concluded that it would not be practical to determine 
the portion of yield differentials that is attributable to differences 
in credit.
    The certifications refer to sales or redemptions of securities 
``before maturity;'' they do not cover redemptions of securities at 
maturity. The proposal in this NPRM limits the yield on reinvestment of 
proceeds of SLGS redeemed before maturity. The proposal does not 
prohibit restructurings of an existing escrow to enhance the efficiency 
of the escrow, so long as the transaction complies with the yield 
limitations in the NPRM.
    The yield certification for subscriptions would apply to 
subscriptions submitted on or after the effective date of the final 
rule. The yield certification for redemptions before maturity would 
apply to requests for redemption of Time Deposit securities subscribed 
for on or after the effective date of the final rule. We anticipate 
that the effective date of the final rule will be the date of 
publication of the final rule. In our discretion, however, we may 
determine that the effective date for some or all of the regulations 
will be at some later date, but the effective date will be no earlier 
than the date of publication of the final rule.
    Second, we propose to reduce the number of hours during which 
SLGSafe subscriptions, requests for early redemption of Time Deposit 
securities, and requests for redemptions of Demand Deposit securities 
will be received to business days from 10 a.m. to 6 p.m., Eastern time. 
The 6 p.m. closing-time generally corresponds to when trading in the 
over-the-counter market in marketable securities declines in New York. 
We selected an eight-hour time frame in an effort to allow sufficient 
time for issuers, including those on the West coast, to complete their 
pricing and verification procedures. Sec.  344.3(g). Access to SLGSafe 
for other functions, such as viewing account balances and obtaining 
statements of accounts, would be provided during existing operational 
hours, 8 a.m. to 10 p.m., Eastern time.
    All changes to a Time Deposit subscription would have to be made by 
3 p.m., Eastern Time, on the issue date. We are not proposing any 
change to the requirement that payment on SLGS securities must be 
submitted by 4 p.m., Eastern time, on the issue date. Sec.  344.2(g).
    Third, we plan to implement a non-regulatory change to make the 
rates specified in the daily SLGS rate table more current. As provided 
in Sec.  344.4(b)(1) of the current regulations, the SLGS rate table 
will be released to the public by 10 a.m., Eastern time, each business 
day. In the rare instances when we are unable to post the current day's 
SLGS rates by 10 a.m., the SLGS rate table for the previous business 
day will apply.
    Fourth, we propose to add a new provision in Sec.  344.2(f)(1)(iv) 
making it impermissible to purchase a SLGS security with a maturity 
longer than is reasonably necessary to accomplish a governmental 
purpose of the issuer. A new example would also be added in proposed 
Sec.  344.2(f)(2)(v).

B. Cancellations

    We receive a large volume of cancellations of SLGS subscriptions 
submitted for the apparent purpose of re-subscribing at a higher yield. 
Issuers also have submitted multiple initial subscriptions for a single 
issue date and have later canceled some of those subscriptions, 
apparently because of reductions in the size of advance refunding 
transactions due to changes in market conditions. Some investors have 
subscribed for SLGS securities, later canceling the subscription or 
amending

[[Page 58758]]

the size when rates move favorably or unfavorably. In still other 
cases, subscriptions have been canceled because agents have subscribed 
for SLGS securities even though the issuer has not authorized the 
issuance of municipal bonds.
    The ability of a SLGS investor to freely cancel a subscription is a 
cost-free option. The current regulations, however, permit an issuer to 
obtain a higher yield by canceling a SLGS subscription within the 
specified period and resubscribing. This provision provides a feature 
that is not available for marketable securities and results in hidden 
costs to the Federal taxpayer. The practice of canceling subscriptions 
also makes Treasury's cash balance forecasting more difficult and 
increases Treasury's borrowing costs. Treasury believes that the 
flexibility and efficiency associated with an issuer's ability to 
select maturities and interest payment dates, make SLGS securities a 
competitive investment vehicle, even without the cancellation option. 
For these reasons, we propose several changes including prohibiting 
cancellations.
    First, cancellations of SLGS subscriptions would be prohibited 
unless the subscriber establishes, to the satisfaction of Treasury, 
that the cancellation is required for reasons unrelated to the use of 
the SLGS program to create a cost-free option. Sec.  344.5(c), 
344.8(c). The example in Sec.  344.2(f)(3)(iv) of the current 
regulations, which permits cancellation and resubscription at a higher 
rate, would be eliminated. The examples in current (i), (ii), (iii) and 
(v) also would be modified to conform with this proposal. The 
applicable SLGS rate table would be the table in effect on the business 
day in which the subscription process was begun. The penalty for an 
impermissible failure to take delivery of SLGS securities would remain 
unchanged--the municipality (or, if applicable, the conduit borrower) 
would be ineligible to subscribe for SLGS securities for six months. 
Sec.  344.2(h).
    Second, for all subscriptions submitted for Time and Demand Deposit 
securities on or after the date of publication of the final rule, we 
propose to amend the regulations to permit a change in the aggregate 
principal amount originally specified in the subscription of no more 
than ten percent. Sec.  344.5(d)(2), Sec.  344.8(d). Currently, 
subscribers for Time Deposit securities may change the aggregate 
principal amount specified in the initial subscription up to $10 
million or ten percent, whichever is greater. Sec.  344.5(b)(4)(ii). 
There is currently no such requirement for Demand Deposit securities; 
the principal amount on Demand Deposit securities may be changed 
without penalty under the current regulations. Sec.  344.8(b)(3).
    Third, we propose that once an issuer selects an issue date for 
Time and Demand Deposit securities, the subscription cannot be amended 
to change the issue date. Sec.  344.5(a), Sec.  344.8(a). Under the 
current regulations, investors are allowed to amend their Time Deposit 
subscription by extending the issue date up to seven days after the 
originally specified issue date. Sec.  344.5(b)(4)(i). The current 
regulations do not permit the issue date on Demand Deposit securities 
to be amended, although typically the issue date for Demand Deposit 
securities is not amended because they are one-day certificates of 
indebtedness that are automatically rolled over each day unless 
redemption is requested. Sec.  344.7.
    Fourth, we propose to require that a subscriber certify, upon 
starting a SLGS subscription, that the issuer has authorized the 
issuance of the state or local bonds. Sec.  344.2(e)(2). In addition, a 
description of the municipal bond issue must be provided in SLGSafe 
(for example, ``Water and Sewer Revenue Bonds Series 2004''). In the 
case of a false certification, Treasury could exercise its reserved 
right to revoke the issuance of the SLGS securities. Sec.  344.2(m)(4).

II. Administrative Changes

    We have also taken this opportunity to review other aspects of the 
SLGS program. We are proposing several changes to better administer the 
program.

A. Pricing Longer-Dated SLGS Securities

    As of October 31, 2001, Treasury discontinued issuing 30-year 
marketable bonds. As a result of the shrinking supply of long-dated 
marketable securities, Treasury is evaluating its ability to estimate 
the long end of the Treasury yield curve and the SLGS rates that are 
derived from the Treasury yield curve. Under the current regulations, 
Time Deposit securities are offered out to 40-year maturities (based on 
the longest Treasury rate). Sec.  344.4(a).
    Treasury proposes to revise the SLGS regulations to allow us to 
establish better pricing methods if it becomes necessary at some point 
in the future. The current regulations provide that ``current Treasury 
borrowing rate'' means the ``the prevailing market rate, as determined 
by Treasury, for a Treasury security with the specified period to 
maturity.'' Sec.  344.1. The definition of ``SLGS rate'' is the 
``current Treasury borrowing rate'' minus five basis points. Sec.  
344.1. Treasury plans to broaden the definition of ``current Treasury 
borrowing rate.'' We propose that in the case where SLGS rates are 
needed for maturities currently not issued by the Treasury, we would 
have the option of establishing the SLGS rates by using suitable 
proxies and/or a different rate-setting methodology. We do not 
anticipate revising our SLGS rate methodology at this time. At any time 
that the Secretary determines that the methodology should be revised, 
we will provide notice of such change.

B. Notices of Redemption

    There currently is a 10-day advance notice requirement for SLGS 
investors to redeem their Time Deposit securities early. Sec.  
344.6(c). We propose to increase the notification period to 14 days to 
improve our cash forecasting. This provision would not apply to Demand 
Deposit securities.

C. Mandating SLGSafe Transactions

    We propose to make SLGSafe mandatory for all transactions. Under 
this proposal, all transactions must flow exclusively through SLGSafe, 
including: Certifications, confirmations, subscriptions, and 
redemptions. Sec.  344.3(b).
    There are tremendous operational efficiencies to be gained from 
mandating the use of existing web-based technology for processing SLGS 
transactions. We first addressed the concept of electronic 
subscriptions in a Proposed Rule published in the Federal Register, 61 
FR 39228, 39230 (Jul. 26, 1996). In the interim rule that introduced 
SLGSafe, we stated our goal of having 100% electronic transactions by 
September 2002. Federal Register, 65 FR 55399, Sept. 13, 2000. We did 
not receive any comments on the interim rule.
    To improve the ease of use, we improved the sign-on procedures for 
SLGSafe. In a Final Interim Rule, effective on August 11, 2004, we 
changed the method of access to SLGSafe. Federal Register, 69 FR 41756, 
Jul. 12, 2004 at Sec.  344.3(g)(1). We did not receive any comments on 
the interim rule. Therefore, it is now possible to access SLGSsafe with 
a log-on ID and password instead of using a digital certificate. The 
log-on ID and password access information is now contained in the 
SLGSafe Application for Internet Access, PD F 4144-5. Sec.  
344.3(c)(1). The application is downloadable from BPD's Web site.
    Because manual subscriptions would no longer be accepted, we 
propose to remove the references in the regulations

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to our fax number and mailing address. Submission of subscriptions by 
fax or mail would only be permitted to the extent it is established to 
the satisfaction of BPD that good cause exists to submit subscriptions 
by other means. Sec.  344.3(f)(3). The SLGS rate table will continue to 
be published on BPD's Web-site. Sec.  344.4(b)(3). If the SLGS rate 
table is not available by 10 a.m., the SLGS rate table for the 
preceding day applies. In the event of a prolonged disruption, we will 
provide additional information on how to conduct SLGS transactions. 
Notification on how to submit subscriptions manually and lock-in a SLGS 
rate will be given. Sec.  344.2(l), Sec.  344.3(f)(4).
    In addition, we propose to remove references to all paper and 
electronic forms, except the SLGSafe Application for Internet Access, 
which SLGSafe users will continue to submit in paper form to BPD.
    We anticipate that use of the SLGSafe service will become mandatory 
on or after the date of publication of the final rule. We recommend 
that all subscribers who are not currently SLGSafe service users submit 
an application for SLGSafe access to BPD as soon as possible.

D. Miscellaneous Changes

    This NPRM includes miscellaneous other minor or technical changes. 
See, e.g., proposed Sec. Sec.  344.0(a), 344.0(b), 344.1, 344.2(d), 
344.2(h)(2), 344.2(i), 344.2(m)(5), 344.3(d), 344.3(f), 344.3(g), 
344.4(a), 344.5, 344.6(a), 344.6(c), 344.6(f), 344.7(a), 344.9(a), 
344.9(c), 344.11. Some of these changes are noted below.
    Current Sec.  344.0(a) provides that issuers of tax-exempt 
securities may purchase SLGS securities from any amounts that: (1) 
Constitute gross proceeds of an issue (as defined in 26 CFR Sec.  
1.148-1(b)); or (2) assist in complying with applicable provisions of 
the Internal Revenue Code relating to the tax exemption. To clarify the 
scope of permissible sources of funds for purchasing SLGS securities, 
we propose to amend the regulations to provide that SLGS securities may 
be purchased only from amounts that constitute gross proceeds of an 
issue.
    Under current Sec.  344.2(h)(2), late payment assessments, which 
include a $100 administrative fee, are due on demand. We propose to 
revise this provision to state that SLGS securities will not be issued 
until such time as we receive payment of the assessments. In addition, 
we have added language to allow us to publish a notice in the Federal 
Register if we determine the administrative fee should be changed. We 
do not anticipate raising the amount of the administrative fee at this 
time.
    Current Sec.  344.2(m) sets forth some of the rights Treasury 
reserves in administering the SLGS program. We propose to add a new 
Sec.  344.2(m)(5) which would clarify that Treasury may review any 
transaction to ensure compliance with this part, including requiring an 
issuer to provide us with additional information relating to SLGS 
transactions, and determine an appropriate remedy under the 
circumstances.
    We are proposing a number of technical changes to make the 
regulations consistent with current SLGSafe procedures and terminology, 
and to conform to other changes in this NPRM. In Sec.  344.5, we have 
eliminated terminology referring to ``initial'' and ``final'' 
subscriptions because SLGSafe does not distinguish between ``initial'' 
and ``final'' subscriptions. Instead of submitting an ``initial'' 
subscription, the issuer would start the subscription process by 
entering certain information in required data fields in SLGSafe. A 
subscriber would complete the subscription by furnishing additional 
information in the designated required data fields in SLGSafe.
    In proposed Sec.  344.11, we have clarified that the early 
redemption provisions for the existing regulations apply to special 
zero interest securities. Issuance of special zero interest securities 
was discontinued on October 28, 1996. The proposals in this NPRM do not 
apply to these outstanding SLGS securities.

III. Procedural Requirements

A. Executive Order 12866

    This notice of proposed rulemaking is not a significant regulatory 
action as defined in E.O. 12866, dated September 30, 1993, and is not a 
major rule under 5 U.S.C. 804. Therefore, a regulatory assessment of 
anticipated benefits, costs, and regulatory alternatives is not 
required.

B. Regulatory Flexibility Act

    Although this notice of proposed rulemaking is being issued in 
proposed form to secure the benefit of public comment, it relates to 
matters of public contract and procedures for United States securities. 
Therefore, the notice and public procedure requirements of the 
Administrative Procedure Act, 5 U.S.C. 553(a)(2), are inapplicable. 
Since a notice of proposed rulemaking is not required, the provisions 
of the Regulatory Flexibility Act, 5 U.S.C. 601 et seq., do not apply.

C. Paperwork Reduction Act

    The collection of information contained in this proposed rule has 
been submitted to the Office of Management and Budget (OMB) for review 
under the requirements of the Paperwork Reduction Act, 44 U.S.C. 
3507(d). 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 control number assigned by OMB.
    Organizations and individuals desiring to submit comments 
concerning the collection of information in the proposed rule should 
direct them to the Desk Officer for the Department of the Treasury, 
Office of Information and Regulatory Affairs, Office of Management and 
Budget, Washington, DC 20503 (preferably by FAX to 202-395-6974, or by 
e-mail to [email protected]). A copy of the comments should also be 
sent to the Bureau of the Public Debt at the addresses previously 
specified. Comments on the collection of information should be received 
by November 1, 2004.
    Treasury specifically invites comments on: (a) Whether the proposed 
collection of information is necessary for the proper performance of 
the mission of Treasury, and whether the information will have 
practical utility; (b) the accuracy of the estimate of the burden of 
the collections of information (see below); (c) ways to enhance the 
quality, utility, and clarity of the information collection; (d) ways 
to minimize the burden of the information collection, including through 
the use of automated collection techniques or other forms of 
information technology; and (e) estimates of capital or start-up costs 
and costs of operation, maintenance, and purchase of services to 
maintain the information.
    The collections of information in this proposed regulation are in 
sections 344.3(f)(3), 344.5(c), and 344.8(c). This information is 
required by the Bureau of the Public Debt (1) to determine whether 
there is good cause for an investor to submit subscriptions by fax or 
mail rather than electronically in SLGSafe and (2) to establish that a 
cancellation of a subscription is required for reasons unrelated to the 
use of the SLGS Program to create a cost-free option. This information 
will be used to determine whether exceptions will be granted to permit 
submission of subscriptions by fax or mail and cancellations of 
subscriptions. The likely respondents are state or local governments.

[[Page 58760]]

    Because of the limited number of instances when a waiver may be 
sought, a ``best estimate'' has been developed based on the considered 
judgment of Treasury. This estimate has 1000 investors each requesting 
an average of one waiver per annum for a total of 1000 waiver requests 
annually.
    The information required by Treasury in connection with a request 
for a waiver of the requirements under the regulations in sections 
344.3(f)(3), 344.5(c), and 344.8(c) is similar to the type of 
information currently received by Treasury when an investor seeks 
relief from a provision of the current regulations. Because of the 
familiarity of SLGS investors with the current procedures for waivers 
and the infrequency of the instances in which these new waivers may be 
sought, the burden associated with compiling and submitting such 
information to Treasury is relatively modest. Accordingly, Treasury 
estimates that the proposed rule will impose .25 hours of burden with 
respect to each request with the total estimated annual burden of the 
proposed rule being 250 hours.
    Estimated total annual reporting and/or recordkeeping burden: 250 
hours.
    Estimated average annual burden hours per respondent and/or 
recordkeeper: .25 hours.
    Estimated number of respondents and/or recordkeepers: 1000.

List of Subjects in 31 CFR Part 344

    Bonds, Government Securities, Securities.

    For the reasons set forth in the preamble, we propose to amend 31 
CFR part 344 by revising subparts A through D to read as follows 
(Appendixes A and B to part 344 remain unchanged):

PART 344--U.S. TREASURY SECURITIES--STATE AND LOCAL GOVERNMENT 
SERIES

Subpart A--General Information
Sec.
344.0 What does this part cover?
344.1 What special terms do I need to know to understand this part?
344.2 What general provisions apply to SLGS securities?
SLGSafeSM Service
344.3 What provisions apply to the SLGSafe Service?
Subpart B--Time Deposit Securities
344.4 What are Time Deposit securities?
344.5 What other provisions apply to subscriptions for Time Deposit 
securities?
344.6 How do I redeem a Time Deposit security before maturity?
Subpart C--Demand Deposit Securities
344.7 What are Demand Deposit securities?
344.8 What other provisions apply to subscriptions for Demand 
Deposit securities?
344.9 How do I redeem a Demand Deposit security?
Subpart D--Special Zero Interest Securities
344.10 What are Special Zero Interest securities?
344.11 How do I redeem a Special Zero Interest security before 
maturity?
Appendix A to Part 344--Early Redemption Market Charge Formulas and 
Examples for Subscriptions from December 28, 1976, through October 
27, 1996.
Appendix B to Part 344--Formula for Determining Redemption Value for 
Securities Subscribed for and Early-Redeemed on or after October 28, 
1996.

    Authority: 26 U.S.C. 141 note; 31 U.S.C. 3102, 3103, 3104, and 
3121.

Subpart A--General Information


Sec.  344.0  What does this part cover?

    (a) What is the purpose of the SLGS securities offering? The 
Secretary of the Treasury (the Secretary) offers for sale non-
marketable State and Local Government Series (SLGS) securities to 
provide issuers of tax-exempt securities with investments from any 
amounts that constitute gross proceeds of an issue.
    (b) What types of SLGS securities are governed by this part? This 
part governs the following SLGS securities:
    (1) Time Deposit securities--may be issued as:

(i) certificates of indebtedness;
(ii) notes; or
(iii) bonds.
    (2) Demand Deposit securities--may be issued as certificates of 
indebtedness.
    (3) Special Zero Interest securities. Special Zero Interest 
securities, which were discontinued on October 28, 1996, were issued 
as:

(i) certificates of indebtedness; or
(ii) notes.
    (c) In what denominations are SLGS securities issued? SLGS 
securities are issued in the following denominations:
    (1) Time Deposit securities--a minimum amount of $1,000, or in any 
larger whole dollar amount; and
    (2) Demand Deposit securities--a minimum amount of $1,000, or in 
any larger amount, in any increment.
    (d) How long is the offering in effect? The offering continues 
until terminated by the Secretary.


Sec.  344.1  What special terms do I need to know to understand this 
part?

    As appropriate, the definitions of terms used in this part are 
those found in the relevant portions of the Internal Revenue Code and 
the Income tax regulations.
    Bond equivalent yield means the annualized yield computed by 
doubling the semiannual yield.
    BPD's website refers to <http://www.slgs.gov.
    Business day(s) means Federal business day(s).
    Current Treasury borrowing rate means the prevailing market rate, 
as determined by Treasury, for a Treasury security with the specified 
period to maturity. In the case where SLGS rates are needed for 
maturities currently not issued by Treasury, at our discretion, 
suitable proxies for Treasury securities and/or a rate setting 
methodology, as determined by the Secretary, may be used to derive a 
current Treasury borrowing rate. At any time that the Secretary 
establishes such proxies or a rate-setting method or determines that 
the methodology should be revised, we will make an announcement.
    Day(s) means calendar day(s).
    Issuer refers to the Government body that issues state or local 
government bonds described in section 103 of the Internal Revenue Code.
    SLGS rate means the current Treasury borrowing rate, less five 
basis points, as released daily by Treasury in a SLGS rate table.
    SLGS rate table means a compilation of SLGS rates available for a 
given day.
    ``We,'' ``us,'' or ``the Secretary'' refers to the Secretary and 
the Secretary's delegates at the Department of the Treasury (Treasury), 
Bureau of the Public Debt (BPD). The term also extends to any fiscal or 
financial agent acting on behalf of the United States when designated 
to act by the Secretary or the Secretary's delegates.
    Yield of a debt instrument is the discount rate that, when used in 
computing the present value of all principal and interest payments 
remaining to be made under the debt instrument, produces an amount 
equal to the price of the debt instrument. In comparing the yield of a 
SLGS security to the yield of a marketable debt instrument, the yield 
of the marketable debt instrument must be computed using the same 
compounding intervals and financial conventions used to compute 
interest on the SLGS security, as specified in Sec.  344.4(c) of this 
part. When comparing the yield of a SLGS note or bond to the yield of a 
marketable debt instrument, use the bond equivalent yield. When 
comparing the yield of a SLGS certificate of indebtedness to the yield 
of a marketable debt instrument, use the simple annual yield.
    You or your refers to a SLGSafe service user or a potential SLGSafe 
service user.

[[Page 58761]]

Sec.  344.2  What general provisions apply to SLGS securities?

    (a) What other regulations apply to SLGS securities? SLGS 
securities are subject to:
    (1) The electronic transactions and funds transfers provisions for 
United States securities, part 370 of this subchapter, ``Electronic 
Transactions and Funds Transfers Related to U.S. Securities''; and
    (2) The Appendix to subpart E to part 306 of this subchapter, for 
rules regarding computation of interest.
    (b) Where are SLGS securities held? SLGS securities are issued in 
book-entry form on the books of BPD.
    (c) Besides BPD, do any other entities administer SLGS securities? 
The Secretary may designate selected Federal Reserve Banks and 
Branches, as fiscal agents of the United States, to perform services 
relating to SLGS securities.
    (d) Can SLGS securities be transferred? No. SLGS securities issued 
as any one type, i.e., Time Deposit, Demand Deposit, or Special Zero 
Interest, cannot be transferred for other securities of that type or 
any other type. Transfer of securities by sale, exchange, assignment, 
pledge, or otherwise is not permitted.
    (e) What certifications must the issuer or its agent provide?
    (1) Agent Certification. When a commercial bank or other agent 
submits a subscription on behalf of the issuer, it must certify that it 
is acting under the issuer's specific authorization. Ordinarily, 
evidence of such authority is not required.
    (2) Municipal Bond Issuance Certification. Upon starting a 
subscription, the subscriber must certify that the issuer has 
authorized the issuance of the state or local bonds.
    (3) Yield Certifications.
    (i) Upon starting a subscription for a SLGS security, a subscriber 
must certify that:
    (A) If the issuer is purchasing a SLGS security with proceeds of 
the sale or redemption (at the option of the holder) before maturity of 
any marketable security, the yield on such SLGS security does not 
exceed the yield at which such marketable security was sold or 
redeemed; and
    (B) If the issuer is purchasing a SLGS security with proceeds of 
the redemption before maturity of a Time Deposit security, the yield on 
the SLGS security being purchased does not exceed the yield that was 
used to determine the amount of redemption proceeds for such redeemed 
Time Deposit security.
    (ii) Upon submission of a request for redemption before maturity of 
a Time Deposit security subscribed for on or after the date of 
publication of the final rule, the issuer must certify that no amount 
received from the redemption will be invested at a yield that exceeds 
the yield that is used to determine the amount of redemption proceeds 
for such Time Deposit security.
    (f) What are some practices involving SLGS securities that are not 
permitted?
    (1) In General. For SLGS securities subscribed for on or after the 
date of publication of the final rule, it is impermissible:
    (i) To use the SLGS program to create a cost-free option;
    (ii) To purchase a SLGS security with any amount received from the 
sale or redemption (at the option of the holder) before maturity of any 
marketable security, if the yield on such SLGS security exceeds the 
yield at which such marketable security is sold or redeemed;
    (iii) To invest any amount received from the redemption before 
maturity of a Time Deposit security at a yield that exceeds the yield 
that is used to determine the amount of redemption proceeds for such 
Time Deposit security; or
    (iv) To purchase a SLGS security with a maturity longer than is 
reasonably necessary to accomplish a governmental purpose of the 
issuer.
    (2) Examples.
    (i) Simultaneous Purchase of Marketable and SLGS Securities. In 
order to fund an escrow for an advance refunding, the issuer 
simultaneously enters into a purchase contract for marketable 
securities and subscribes for SLGS securities, such that either 
purchase is sufficient to pay the cash flows on the outstanding bonds 
to be refunded, but together, the purchases are greatly in excess of 
the amount necessary to pay the cash flows. The issuer plans that, if 
interest rates decline during the period between the date of starting a 
SLGS subscription and the requested date of issuance of SLGS 
securities, the issuer will enter into an offsetting agreement to sell 
the marketable securities and use the bond proceeds to purchase SLGS 
securities to fund the escrow. If, however, interest rates do not 
decline in that period, the issuer plans to use the bond proceeds to 
purchase the marketable securities to fund the escrow and cancel the 
SLGS securities subscription. This practice violates the prohibition on 
cancellation under Sec.  344.5(c) or Sec.  344.8(c), and no exception 
or waiver would be granted under this part because the ability to 
cancel in these circumstances would result in the SLGS program being 
used to create a cost-free option. In addition, this practice is 
prohibited under paragraph (f)(1)(i).
    (ii) Sale of Marketable Securities Conditioned on Interest Rates. 
The existing escrow for an advance refunding contains marketable 
securities which produce a negative arbitrage. In order to reduce or 
eliminate this negative arbitrage, the issuer subscribes for SLGS 
securities at a yield higher than the yield on the existing escrow, but 
less than the permitted yield. At the same time, the issuer agrees to 
sell the marketable securities in the existing escrow to a third party 
and use the proceeds to purchase SLGS securities if interest rates 
decline between the date of subscribing for SLGS securities and the 
requested date of issuance of SLGS securities. The marketable 
securities would be sold at a yield which is less than the yield on the 
SLGS securities purchased. The issuer and the third party further agree 
that if interest rates increase during this period, the issuer will 
cancel the SLGS securities subscription. This practice violates the 
prohibition on cancellation under Sec.  344.5(c) or Sec.  344.8(c), and 
no exception or waiver would be granted under this part because the 
ability to cancel in these circumstances would result in the SLGS 
program being used to create a cost-free option. In addition, this 
practice is prohibited under paragraphs (f)(1)(i) and (ii).
    (iii) Sale of Marketable Securities Not Conditioned on Interest 
Rates. The facts are the same as in paragraph (f)(2)(ii) of this 
section, except that in this case, the agreement entered into by the 
issuer with a third party to sell the marketable securities in order to 
obtain funds to purchase SLGS securities is not conditioned upon 
changes in interest rates on Treasury securities. This practice 
violates the yield gain prohibition in paragraph (f)(1)(ii) and is 
prohibited.
    (iv) Simultaneous Subscription for SLGS Securities and Sale of 
Option to Purchase Marketable Securities. The issuer holds a portfolio 
of marketable securities in an account that produces negative 
arbitrage. In order to reduce or eliminate this negative arbitrage, the 
issuer subscribes for SLGS securities for purchase in sixty days. At 
the same time, the issuer sells an option to purchase the portfolio of 
marketable securities. If interest rates increase, the holder of the 
option will not exercise its option and the issuer will cancel the SLGS 
securities subscription. On the other hand, if interest rates decline, 
the option holder will exercise the option and the issuer will use the 
proceeds to purchase SLGS securities. This practice

[[Page 58762]]

violates the prohibition on cancellation under Sec.  344.5(c) or Sec.  
344.8(c), and no exception or waiver would be granted under this part 
because the ability to cancel in these circumstances would result in 
the SLGS program being used to create a cost-free option. In addition, 
this practice is prohibited under paragraphs (f)(1)(i).
    (v) Purchase of SLGS Securities with a Maturity Longer than 
Reasonably Necessary. An issuer issues bonds to finance a construction 
project. The issuer reasonably expects to spend all of the proceeds of 
the bonds on the project within three years after the bonds are issued. 
Nevertheless, on the issue date of the bonds, the issuer invests all of 
the bond proceeds in SLGS securities with a 20-year maturity. The 
issuer expects to redeem all of the SLGS securities during the three-
year construction period. The issuer expects that interest rates will 
decline substantially during that three-year period and, as a result, 
the issuer will realize a substantial profit from redeeming the SLGS 
securities before maturity. The issuer's purchase of the SLGS 
securities violates paragraph (f)(1)(iv) because the 20-year maturity 
is longer than is reasonably necessary to accomplish the issuer's 
governmental purpose of constructing its project.
    (g) When and how do I pay for SLGS securities? You must submit full 
payment for each subscription to BPD no later than 4 p.m., Eastern 
time, on the issue date. Submit payments by the Fedwire funds transfer 
system with credit directed to the Treasury's General Account. For 
these transactions, BPD's ABA Routing Number is 051036476.
    (h) What happens if I need to make an untimely change or do not 
settle on a subscription? An untimely change can only be made in 
accordance with Sec.  344.2(n) of this part. The penalty imposed for 
failure to make settlement on a subscription that you submit will be to 
render you ineligible to subscribe for SLGS securities for six months 
beginning on the date the subscription is withdrawn, or the proposed 
issue date, whichever occurs first.
    (1) Upon whom is the penalty imposed? If you are the issuer, the 
penalty is imposed on you unless you provide the Taxpayer 
Identification Number of the conduit borrower that is the actual party 
failing to make settlement of a subscription. If you provide the 
Taxpayer Identification Number for the conduit borrower, the six-month 
penalty will be imposed on the conduit borrower.
    (2) What occurs if Treasury exercises the option to waive the 
penalty? If you settle after the proposed issue date and we determine 
that settlement is acceptable on an exception basis, we will waive, 
under Sec.  344.2(n), the six-month penalty under paragraph (h) of this 
section. You shall be charged a late payment assessment. The late 
payment assessment equals the amount of interest that would have 
accrued on the SLGS securities from the proposed issue date to the date 
of settlement plus an administrative fee of $100 per subscription, or 
such other amount as we may publish in the Federal Register. We will 
not issue SLGS securities until we receive the late payment assessment, 
which is due on demand.
    (i) What happens at maturity? Upon the maturity of a security, we 
will pay the owner the principal amount and interest due. A security 
scheduled for maturity on a non-business day will be redeemed on the 
next business day.
    (j) How will I receive payment? We will make payment by the 
Automated Clearing House (ACH) method for the owner's account at a 
financial institution as designated by the owner. We may use substitute 
payment procedures, instead of ACH, if we consider it to be necessary. 
Any such action is final.
    (k) How do I contact BPD? BPD's contact information is posted on 
BPD's Web site.
    (l) Will the offering be changed during a debt limit or disaster 
contingency? We reserve the right to change or suspend the terms and 
conditions of the offering (including provisions relating to 
subscriptions for, and issuance of, SLGS securities; interest payments; 
early redemptions; and rollovers) at any time the Secretary determines 
that the issuance of obligations sufficient to conduct the orderly 
financing operations of the United States cannot be made without 
exceeding the statutory debt limit, or that a disaster situation 
exists. We will announce such changes by any means that the Secretary 
deems appropriate.
    (m) What are some of the rights that Treasury reserves in 
administering the SLGS program? We may decide, in our sole discretion, 
to take any of the following actions. Such actions are final. 
Specifically, Treasury reserves the right:
    (1) To reject any SLGSafe Application for Internet Access;
    (2) To reject any electronic message or other message or request, 
including requests for subscription and redemption, that is 
inappropriately completed or untimely submitted;
    (3) To refuse to issue any SLGS securities in any case or class of 
cases;
    (4) To revoke the issuance of any SLGS securities and to declare 
the subscriber ineligible thereafter to subscribe for securities under 
the offering if the Secretary deems that such action is in the public 
interest and any security is issued on the basis of an improper 
certification or other misrepresentation (other than as the result of 
an inadvertent error) or there is an impermissible transaction under 
Sec.  344.2(f); or
    (5) To review any transaction for compliance with this part, 
including requiring an issuer to provide additional information, and to 
determine an appropriate remedy under the circumstances.
    (n) Are there any situations in which Treasury may waive these 
regulations? We reserve the right, at our discretion, to waive or 
modify any provision of these regulations in any case or class of 
cases. We may do so if such action is not inconsistent with law and 
will not subject the United States to substantial expense or liability.
    (o) Are SLGS securities callable by Treasury? No. Treasury cannot 
call a SLGS security for redemption before maturity.

SLGSafe\SM\ Service


Sec.  344.3  What provisions apply to the SLGSafe Service?

    (a) What is the SLGSafe Service? SLGSafe is a secure Internet site 
on the World Wide Web through which subscribers submit SLGS securities 
transactions. SLGSafe Internet transactions constitute electronic 
messages under 31 CFR part 370.
    (b) Is SLGSafe use mandatory? Yes. You must submit all transactions 
through SLGSafe.
    (c) What terms and conditions apply to SLGSafe? The terms and 
conditions contained in the following documents, which may be 
downloaded from BPD's Web site and which may change from time to time, 
apply to SLGSafe transactions:
    (1) SLGSafe Application for Internet Access and SLGSafe User 
Acknowledgment; and
    (2) SLGSafe User's Manual.
    (d) Who can apply for SLGSafe access? If you are an owner of SLGS 
securities or act as a trustee or other agent of the owner, you can 
apply to BPD for SLGSafe access. Other potential users of SLGSafe 
include, but are not limited to, underwriters, financial advisors, and 
bond counsel.
    (e) How do I apply for SLGSafe access? Submit to BPD a completed 
SLGSafe Application for Internet Access. The form is found on BPD's Web 
site.
    (f) What are the conditions of SLGSafe use? If you are designated 
as an

[[Page 58763]]

authorized user, on a SLGSafe application that we've approved, you 
must:
    (1) Assume the sole responsibility and the entire risk of use and 
operation of your electronic connection;
    (2) Agree that we may act on any electronic message to the same 
extent as if we had received a written instruction bearing the 
signature of your duly authorized officer;
    (3) Submit electronic messages and other transaction requests 
exclusively through SLGSafe, except to the extent you establish to the 
satisfaction of BPD that good cause exists for you to submit such 
subscriptions and requests by other means; and
    (4) Agree to submit transactions manually if we notify you that due 
to problems with hardware, software, data transmission, or any other 
reason, we are unable to send or receive electronic messages through 
SLGSafe.
    (g) When is the SLGSafe window open? All SLGSafe subscriptions, 
requests for early redemption of Time Deposit securities, and requests 
for redemption of Demand Deposit securities must be received by BPD on 
business days no earlier than 10 a.m. and no later than 6 p.m., Eastern 
time. The official time is the date and time as shown on BPD's 
application server. Except as otherwise provided in Sec.  344.5(d) and 
Sec.  344.8(d), all other functions may be performed during the 
extended SLGSafe hours, from 8 a.m. until 10 p.m., Eastern time.

Subpart B--Time Deposit Securities


Sec.  344.4  What are Time Deposit securities?

    Time Deposit securities are issued as certificates of indebtedness, 
notes, or bonds.
    (a) What are the maturity periods? The issuer must fix the maturity 
periods for Time Deposit securities, which are issued as follows:
    (1) Certificates of indebtedness that do not bear interest. For 
certificates of indebtedness that do not bear interest, the issuer can 
fix a maturity period of not less than fifteen days and not more than 
one year.
    (2) Certificates of indebtedness that bear interest. For 
certificates of indebtedness that bear interest, the issuer can fix a 
maturity period of not less than thirty days and not more than one 
year.
    (3) Notes. For notes, the issuer can fix a maturity period of not 
less than one year and one day, and not more than ten years.
    (4) Bonds. For bonds, the issuer can fix a maturity period of not 
less than ten years and one day, and not more than forty years.
    (b) How do I select the SLGS rate? For each security, the issuer 
shall designate an interest rate that does not exceed the maximum 
interest rate shown in the daily SLGS rate table as defined in Sec.  
344.1.
    (1) When is the SLGS rate table released? We release the SLGS rate 
table to the public by 10 a.m., Eastern time, each business day. If the 
SLGS rate table is not available at that time on any given business 
day, the SLGS rate table for the preceding business day applies.
    (2) How do I lock-in a SLGS rate? The applicable daily SLGS rate 
table for a SLGSafe subscription is the one in effect on the business 
day that you start the subscription process. This table is shown on 
BPD's Application server.
    (3) Where can I find the SLGS rate table? The SLGS rate table can 
be obtained at BPD's Web site.
    (c) How are interest computation and payment dates determined? 
Interest on a certificate of indebtedness is computed on an annual 
basis and is paid at maturity with the principal. Interest on a note or 
bond is paid semi-annually. The issuer specifies the first interest 
payment date, which must be at least thirty days and less than or equal 
to one year from the date of issue. The final interest payment date 
must coincide with the maturity date of the security. Interest for 
other than a full interest period is computed on the basis of a 365-day 
or 366-day year (for certificates of indebtedness) and on the basis of 
the exact number of days in the half-year (for notes and bonds). See 
the Appendix to subpart E to part 306 of this subchapter for rules 
regarding computation of interest.


Sec.  344.5  What other provisions apply to subscriptions for Time 
Deposit securities?

    (a) When is my subscription due? The subscriber must fix the issue 
date of each security in the subscription. The issue date cannot be 
changed. The issue date must be a business day. The issue date cannot 
be more than sixty days after the date BPD receives the subscription. 
If the subscription is for $10 million or less, BPD must receive a 
subscription at least five days before the issue date. If the 
subscription is for over $10 million, BPD must receive the subscription 
at least seven days before the issue date.
    EXAMPLE to paragraph (a): If SLGS securities totaling $10 million 
or less will be issued on November 16th, BPD must receive the 
subscription no later than November 11th. If SLGS securities totaling 
more than $10 million will be issued on November 16th, BPD must receive 
the subscription no later than November 9th. In all cases, if SLGS 
securities will be issued on November 16th, BPD will not accept the 
subscription before September 17th.
    (b) How do I start the subscription process? A subscriber starts 
the subscription process by entering into SLGSafe the following 
information:
    (1) The issue date;
    (2) The total principal amount;
    (3) The issuer's name and Taxpayer Identification Number;
    (4) The title of an official authorized to purchase SLGS 
securities;
    (5) A description of the municipal bond issue;
    (6) The certification required by Sec.  344.2(e)(1), if the 
subscription is submitted by an agent of the issuer; and
    (7) The certification required by Sec.  344.2(e)(2) (relating to 
authorization of the state or local bonds).
    (c) Under what circumstances can I cancel a subscription? You 
cannot cancel a subscription unless you establish, to the satisfaction 
of Treasury, that the cancellation is required for reasons unrelated to 
the use of the SLGS program to create a cost-free option.
    (d) How do I change a subscription? You can change a subscription 
on or before 3 p.m., Eastern time, on the issue date. Changes to a 
subscription are acceptable with the following exceptions:
    (1) You cannot change the issue date;
    (2) You cannot change the aggregate principal amount originally 
specified in the subscription by more than ten percent; and
    (3) You cannot change an interest rate to exceed the maximum 
interest rate in the SLGS rate table that was in effect for a security 
of comparable maturity on the business day that you began the 
subscription process.
    (e) How do I complete the subscription process? The completed 
subscription must:
    (1) Be dated and submitted by an official authorized to make the 
purchase;
    (2) Separately itemize securities by the various maturities, 
interest rates, and first interest payment dates (in the case of notes 
and bonds);
    (3) Not be more than ten percent above or below the aggregate 
principal amount originally specified in the subscription;
    (4) Not be paid with proceeds that are derived, directly or 
indirectly, from the redemption before maturity of SLGS securities 
subscribed for on or before December 27, 1976;
    (5) Include the certifications required by Sec.  344.2(e)(3)(i); 
and
    (6) Include the information required under paragraph (b), if not 
already provided.

[[Page 58764]]

    (f) When must I complete the subscription? BPD must receive a 
completed subscription on or before 3 p.m., Eastern time, on the issue 
date.


Sec.  344.6  How do I redeem a Time Deposit security before maturity?

    (a) What is the minimum time a security must be held?
    (1) Zero percent certificates of indebtedness of 16 to 29 days. A 
zero percent certificate of indebtedness of 16 to 29 days can be 
redeemed, at the owner's option, no earlier than 15 days after the 
issue date.
    (2) Certificates of indebtedness of 30 days or more. A certificate 
of indebtedness of 30 days or more can be redeemed, at the owner's 
option, no earlier than 25 days after the issue date.
    (3) Notes or bonds. A note or bond can be redeemed, at the owner's 
option, no earlier than 30 days after the issue date.
    (b) Can I request partial redemption of a security balance? You may 
request partial redemptions in any whole dollar amount; however, a 
security balance of less than $1,000 must be redeemed in total.
    (c) Do I have to submit a request for early redemption? Yes. An 
official authorized to redeem the securities before maturity must 
submit an electronic request in SLGSafe. The request must show the 
Taxpayer Identification Number of the issuer, the security number, and 
the dollar amount of the securities to be redeemed. Upon submission of 
a request for redemption before maturity of a security subscribed for 
on or after the date of publication of the final rule, the request must 
include a yield certification under Sec.  344.2(e)(3)(ii). BPD must 
receive the request no less than 14 days and no more than 60 days 
before the requested redemption date. You cannot cancel the request.
    (d) How do I calculate the amount of redemption proceeds for 
subscriptions on or after October 28, 1996? For securities subscribed 
for on or after October 28, 1996, the amount of the redemption proceeds 
is calculated as follows:
    (1) Interest. If a security is redeemed before maturity on a date 
other than a scheduled interest payment date, Treasury pays interest 
for the fractional interest period since the last interest payment 
date.
    (2) Redemption value. The remaining interest and principal payments 
are discounted by the current Treasury borrowing rate for the remaining 
term to maturity of the security redeemed. This may result in a premium 
or discount to the issuer depending on whether the current Treasury 
borrowing rate is unchanged, lower, or higher than the stated interest 
rate of the early-redeemed SLGS securities. There is no market charge 
for the redemption of zero interest Time Deposit securities subscribed 
for on or after October 28, 1996. Redemption proceeds in the case of a 
zero-interest security are a return of the principal invested. The 
formulas for calculating the redemption value under this paragraph, 
including examples of the determination of premiums and discounts, are 
set forth in Appendix B of this part.
    (e) How do I calculate the amount of redemption proceeds for 
subscriptions from September 1, 1989, through October 27, 1996? For 
securities subscribed for from September 1, 1989, through October 27, 
1996, the amount of the redemption proceeds is calculated as follows:
    (1) Interest. If a security is redeemed before maturity on a date 
other than a scheduled interest payment date, Treasury pays interest 
for the fractional interest period since the last interest payment 
date.
    (2) Market charge. An amount shall be deducted from the redemption 
proceeds if the current Treasury borrowing rate for the remaining 
period to original maturity exceeds the rate of interest originally 
fixed for such security. The amount shall be the present value of the 
future increased borrowing cost to the Treasury. The annual increased 
borrowing cost for each interest period is determined by multiplying 
the principal by the difference between the two rates. For notes and 
bonds, the increased borrowing cost for each remaining interest period 
to original maturity is determined by dividing the annual cost by two. 
Present value is determined by using the current Treasury borrowing 
rate as the discount factor. When you request a redemption date that is 
less than thirty days before the original maturity date, we will apply 
the rate of a one month security as listed on the SLGS rate table 
issued on the day you make a redemption request. The market charge 
under this paragraph can be computed by using the formulas in Appendix 
A of this part.
    (f) How do I calculate the amount of redemption proceeds for 
subscriptions from December 28, 1976, through August 31, 1989? For 
securities subscribed for from December 28, 1976, through August 31, 
1989, the amount of the redemption proceeds is calculated as follows:
    (1) Interest. Interest for the entire period the security was 
outstanding shall be recalculated if the original interest rate of the 
security is higher than the interest rate that would have been set at 
the time of the initial subscription had the term of the security been 
for the shorter period. If this results in an overpayment of interest, 
we will deduct from the redemption proceeds the aggregate amount of 
such overpayments, plus interest, compounded semi-annually thereon, 
from the date of each overpayment to the date of redemption. The rate 
used in calculating the interest on the overpayment will be one-eighth 
of one percent above the maximum rate that would have applied to the 
initial subscription had the term of the security been for the shorter 
period. If a bond is redeemed before maturity on a date other than a 
scheduled interest payment date, no interest is paid for the fractional 
interest period since the last interest payment date.
    (2) Market charge. An amount shall be deducted from the redemption 
proceeds in all cases where the current Treasury borrowing rate for the 
remaining period to original maturity of the security prematurely 
redeemed exceeds the rate of interest originally fixed for such 
security. You can compute the market charge under this paragraph by 
using the formulas in Appendix A of this part.
    (g) How do I calculate the amount of redemption proceeds for 
subscriptions on or before December 27, 1976? For bonds subscribed for 
on or before December 27, 1976, the amount of the redemption proceeds 
is calculated as follows.
    (1) Interest. The interest for the entire period the bond was 
outstanding shall be recalculated if the original interest rate at 
which the bond was issued is higher than an adjusted interest rate 
reflecting both the shorter period during which the bond was actually 
outstanding and a penalty. The adjusted interest rate is the Treasury 
rate which would have been in effect on the date of issue for a 
marketable Treasury bond maturing on the semi-annual maturity period 
before redemption reduced by a penalty which must be the lesser of:
    (i) One-eighth of one percent times the number of months from the 
date of issuance to original maturity, divided by the number of full 
months elapsed from the date of issue to redemption; or
    (ii) One-fourth of one percent.
    (2) Deduction. We will deduct from the redemption proceeds, if 
necessary, any overpayment of interest resulting from previous payments 
made at a higher rate based on the original longer period to maturity.

[[Page 58765]]

Subpart C--Demand Deposit Securities


Sec.  344.7  What are Demand Deposit securities?

    Demand Deposit securities are one-day certificates of indebtedness 
that are automatically rolled over each day until you request 
redemption.
    (a) How are the SLGS rates for Demand Deposit securities 
determined? Each security shall bear a variable rate of interest based 
on an adjustment of the average yield for three-month Treasury bills at 
the most recent auction. A new rate is effective on the first business 
day following the regular auction of three-month Treasury bills and is 
shown in the SLGS rate table. Interest is accrued and added to the 
principal daily. Interest is computed on the balance of the principal, 
plus interest accrued through the preceding day.
    (1) How is the interest rate calculated?
    (i) First, you calculate the annualized effective Demand Deposit 
rate in decimals, designated ``I'' in Equation 1, as follows:

[GRAPHIC] [TIFF OMITTED] TP30SE04.202


where:

I =Annualized effective Demand Deposit rate in decimals.
P =Average auction price for the most recently auctioned 13-week 
Treasury bill, per hundred, to three decimals.
Y =365 (if the year following issue date does not contain a leap year 
day) or 366 (if the year following issue date does contain a leap year 
day).
DTM =The number of days from date of issue to maturity for the most 
recently auctioned 13-week Treasury bill.
MTR =Estimated marginal tax rate, in decimals, of purchasers of tax-
exempt bonds.
TAC =Treasury administrative costs, in decimals.

    (ii) Then, you calculate the daily factor for the Demand Deposit 
rate as follows:

[GRAPHIC] [TIFF OMITTED] TP30SE04.203

    (2) Where can I find additional information? Information on the 
estimated average marginal tax rate and costs for administering Demand 
Deposit securities, both to be determined by Treasury from time to 
time, will be published in the Federal Register.
    (b) What happens to Demand Deposit securities during a Debt Limit 
Contingency? At any time the Secretary determines that issuance of 
obligations sufficient to conduct the orderly financing operations of 
the United States cannot be made without exceeding the statutory debt 
limit, we will invest any unredeemed Demand Deposit securities in 
special ninety-day certificates of indebtedness. Funds invested in the 
ninety-day certificates of indebtedness earn simple interest equal to 
the daily factor in effect at the time Demand Deposit security issuance 
is suspended, multiplied by the number of days outstanding. When 
regular Treasury borrowing operations resume, the ninety-day 
certificates of indebtedness, at the owner's option, are:
    (1) Payable at maturity;
    (2) Redeemable before maturity, provided funds are available for 
redemption; or
    (3) Reinvested in Demand Deposit securities.


Sec.  344.8  What other provisions apply to subscriptions for Demand 
Deposit securities?

    (a) When is my subscription due? The subscriber must fix the issue 
date of each security in the subscription. The issue date cannot be 
changed. The issue date must be a business day. The issue date cannot 
be more than sixty days after the date BPD receives the subscription. 
If the subscription is for $10 million or less, BPD must receive the 
subscription at least five days before the issue date. If the 
subscription is for more than $10 million, BPD must receive the 
subscription at least seven days before the issue date.
    (b) How do I start the subscription process? A subscriber starts 
the subscription process by entering into SLGSafe the following 
information:
    (1) The issue date;
    (2) The total principal amount;
    (3) The issuer's name and Taxpayer Identification Number;
    (4) The title of an official authorized to purchase SLGS 
securities;
    (5) A description of the municipal bond issue;
    (6) The certification required by Sec.  344.2(e)(1), if the 
subscription is submitted by an agent of the issuer; and
    (7) The certification required by Sec.  344.2(e)(2) (relating to 
authorization of the state or local bonds).
    (c) Under what circumstances can I cancel a subscription? You 
cannot cancel a subscription unless you establish, to the satisfaction 
of Treasury, that the cancellation is required for reasons unrelated to 
the use of the SLGS program to create a cost-free option.
    (d) How do I change a subscription? You can change a subscription 
on or before 3 p.m., Eastern time, on the issue date. You may change 
the aggregate principal amount specified in the subscription by no more 
than ten percent, above or below the amount originally specified in the 
subscription.
    (e) How do I complete the subscription process? The subscription 
must:
    (1) Be dated and submitted electronically by an official authorized 
to make the purchase;
    (2) Include the certifications required by Sec.  344.2(e)(3)(i) 
(relating to yield); and
    (3) Include the information required under paragraph (b) of this 
section, if not already provided.


Sec.  344.9  How do I redeem a Demand Deposit security?

    (a) When must I notify BPD to redeem a security? A Demand Deposit 
security can be redeemed at the owner's option, if BPD receives a 
request for redemption not less than:
    (1) 1 business day before the requested redemption date for 
redemptions of $10 million or less; and
    (2) 3 business days before the requested redemption date for 
redemptions of more than $10 million.
    (b) Can I request partial redemption of a security balance? You may 
request partial redemptions in any amount. If your account balance is 
less than $1,000, it must be redeemed in total.
    (c) Do I have to submit a request for redemption? Yes. An official 
authorized to redeem the securities must submit an electronic request 
through SLGSafe. The request must show the Taxpayer Identification 
Number of the issuer, the security number, and the dollar amount of the 
securities to be redeemed. BPD must receive the request by 3 p.m., 
Eastern time on the required day. You cannot cancel the request.

Subpart D--Special Zero Interest Securities


Sec.  344.10  What are Special Zero Interest securities?

    Special zero interest securities were issued as certificates of 
indebtedness

[[Page 58766]]

and notes. The provisions of subpart B of this part (Time Deposit 
securities) apply except as specified in Subpart D of this part. 
Special Zero Interest securities were discontinued on October 28, 1996. 
The only zero interest securities available after October 28, 1996, are 
zero interest Time Deposit securities that are subject to subpart B of 
this part.


Sec.  344.11  How do I redeem a Special Zero Interest Security before 
maturity?

    Follow the provisions of Sec.  344.6(a)-(g) as published in the 
Federal Register, 65 FR 55399, Sept. 13, 2000, except that no market 
charge or penalty will apply when you redeem a special zero interest 
security before maturity.

    Dated: September 24, 2004.
Donald V. Hammond,
Fiscal Assistant Secretary.
[FR Doc. 04-21909 Filed 9-27-04; 11:15 am]
BILLING CODE 4810-39-P