[Federal Register Volume 85, Number 100 (Friday, May 22, 2020)]
[Notices]
[Pages 31282-31284]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-11160]


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DEPARTMENT OF THE TREASURY

[Docket No. TREAS-DO-2020-0007]


Development and Potential Issuance of Treasury Floating Rate 
Notes Indexed to the Secured Overnight Financing Rate

AGENCY: Department of the Treasury.

ACTION: Notice and request for information.

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SUMMARY: The Department of the Treasury (Treasury) is requesting 
comments on the possibility of issuing a floating rate note (FRN) 
indexed to the Secured Overnight Financing Rate (SOFR) published by the 
SOFR Administrator, currently the Federal Reserve Bank of New York 
(FRBNY). Treasury has not made a decision whether to issue FRNs indexed 
to SOFR (SOFR-indexed FRNs). Treasury will continue to weigh the merits 
of SOFR-indexed FRNs, and comments received as part of this request for 
information will serve as valuable input into this decision.

DATES:  Comments are due by July 6, 2020.

ADDRESSES: You may submit comments using any of the following methods:
    Federal eRulemaking Portal: www.regulations.gov. Follow the 
instructions on the website for submitting comments.
    Email: [email protected]. Include docket number TREAS-
DO-2020-0007 in the subject line of the message.
    All submissions should refer to docket number TREAS-DO-2020-0007. 
Please submit your comments using only one method, along with your full 
name and mailing address. We will post all comments on 
www.regulations.gov and www.treasurydirect.gov. In general, comments 
received, including attachments and other supporting materials, are 
part of the public record and are available to the public. Do not 
submit any information in your comments or supporting materials that 
you consider confidential or inappropriate for public disclosure.

FOR FURTHER INFORMATION CONTACT: Fred Pietrangeli, Director, Office of 
Debt Management, Office of the Assistant Secretary for Financial 
Markets, at [email protected] or 
[email protected]. Questions about submitting comments 
should be directed to Lori Santamorena, Government Securities 
Regulations Staff, at (202) 504-3632 or [email protected].

SUPPLEMENTARY INFORMATION: 

I. Background

    Treasury continually seeks to finance the government at the lowest 
cost over time, manage its liability profile, foster healthy secondary 
markets, and expand the investor base for Treasury securities. Treasury 
is examining potential new products in pursuit of these goals.
    Following substantial analysis and consideration of input from 
market participants, in 2014 Treasury began issuing FRNs indexed to the 
13-week Treasury bill rate (13-week T-bill FRNs). Since their launch, 
Treasury has issued more than $1.1 trillion of 13-week T-bill FRNs. A 
Treasury analysis released in 2017 showed that issuing 13-week T-bill 
FRNs had reduced realized interest costs by $1.3 billion (when compared 
to 2-year fixed-rate notes).\1\
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    \1\ See 4th Quarter 2017 Treasury Borrowing Advisory Committee 
Discussion Charts, available at https://www.treasury.gov/resource-center/data-chart-center/quarterly-refunding/Documents/Q42017CombinedChargesforArchives.pdf.

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[[Page 31283]]

    In light of the success of the 13-week T-bill FRN program and 
recent market developments, Treasury is exploring the possibility of 
issuing SOFR-indexed FRNs.\2\ Treasury has discussed the potential 
issuance of SOFR-indexed FRNs with the Treasury Borrowing Advisory 
Committee (TBAC),\3\ the primary dealers,\4\ and other Treasury market 
participants. These discussions have provided helpful feedback,\5\ and 
Treasury now seeks additional views from the public on the questions 
below.
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    \2\ See October 30, 2019 Quarterly Refunding Policy Statement, 
available at https://home.treasury.gov/news/press-releases/sm810 and 
February 5, 2020 Quarterly Refunding Policy Statement available at 
https://home.treasury.gov/news/press-releases/sm896.
    \3\ TBAC is a federal advisory committee that advises Treasury 
on debt management and other topics. See 2nd Quarter 2019 TBAC 
Discussion Charts, available at https://www.treasury.gov/resource-center/data-chart-center/quarterly-refunding/Documents/q22019CombinedChargesforArchives.pdf and 3rd Quarter 2019 TBAC 
Discussion Charts, available at https://www.treasury.gov/resource-center/data-chart-center/quarterly-refunding/Documents/q32019CombinedChargesforArchives.pdf.
    \4\ The primary dealers serve as trading counterparties to FRBNY 
in its implementation of monetary policy. Primary dealers are also 
required to participate in all Treasury marketable securities 
auctions.
    \5\ See May 6, 2020 Quarterly Refunding Policy Statement, 
available at https://home.treasury.gov/news/press-releases/sm1001.
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    Treasury's primary motivation for exploring SOFR-indexed FRNs is 
the consideration of new debt products that can be issued at the lowest 
cost of financing for the U.S. government. Treasury is cognizant that 
its issuance decisions can have broader effects on other issuers and 
market practices. Regardless of any decision about issuing SOFR-indexed 
FRNs, Treasury, as an ex-officio member of the Alternative Reference 
Rates Committee (ARRC), is committed to promoting the transition away 
from U.S. dollar London Interbank Offered Rate (LIBOR).\6\
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    \6\ The ARRC is a group of private-market participants convened 
by the Board of Governors of the Federal Reserve System and FRBNY to 
help transition from U.S. dollar LIBOR to SOFR. See https://www.newyorkfed.org/arrc.
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II. Solicitation for Comments

    Treasury invites views on the following topics. Please include: (1) 
The data or reasons, including examples, supporting any opinions or 
conclusions; (2) alternative approaches and options that should be 
considered, if any; and (3) any specific comments regarding general 
terms and conditions for the sale and issuance of Treasury SOFR-indexed 
FRNs.

1. Market Demand

    1.1 Which types of investors would be the primary buyers of 
Treasury SOFR-indexed FRNs? Would Treasury SOFR-indexed FRNs attract 
new investor types or additional demand from existing Treasury 
investors? Assuming the possibility of a 1-year or 2-year maturity, how 
would the tenor of a Treasury SOFR-indexed FRN affect demand?
    1.2 Please estimate annual demand for Treasury SOFR-indexed FRNs. 
Would demand be greater for a shorter tenor? How would potential growth 
in issuance of SOFR-indexed FRNs by other issuers affect long-term 
demand for Treasury SOFR-indexed FRNs?

2. Pricing and Liquidity

    2.1 Would introducing a Treasury SOFR-indexed FRN help Treasury 
finance the government at the lowest cost over time? Why or why not?
    2.2 How would you expect a Treasury SOFR-indexed security to price 
relative to a comparable maturity 13-week T-bill FRN security? How 
would this pricing vary across the economic cycle and interest rate 
environments? Please provide pricing estimates.
    2.3 SOFR has risen significantly for certain short time periods, 
such as around some ends of months, quarters, and years. To what extent 
would such patterns, if they continue, affect the interest cost for 
Treasury on a SOFR-indexed FRN, the interest payments of which would be 
based on a SOFR averaged or compounded rate over a longer interest 
accrual period? To what extent would investors be willing to bid lower 
discount margins at auctions for Treasury SOFR-indexed FRNs in 
expectation of such patterns continuing? Please elaborate.
    2.4 During the global financial crisis, repurchase agreement rates 
were persistently higher than Treasury bill rates. More recently, 
during the COVID-19 outbreak, liquidity in Treasury and other markets 
(including repurchase agreement markets) exhibited signs of stress. How 
would potential future periods of market stress affect SOFR? In a 
potential future period of market stress, how might interest costs for 
Treasury differ between a Treasury SOFR-indexed FRN and the 13-week T-
bill FRN? Please elaborate.
    2.5 How liquid would Treasury SOFR-indexed FRNs be in secondary 
markets? Please compare the expected liquidity of Treasury SOFR-indexed 
FRNs to Treasury bills, the existing 13-week T-bill FRN, and off-the-
run short-dated coupons.

3. Security Structure

    3.1 What are the primary considerations Treasury should evaluate 
when structuring a Treasury SOFR-indexed FRN? How would different 
potential security structures affect investment decisions by market 
participants, including with respect to activity in derivatives 
markets?
    3.2 Some previously gathered feedback has suggested a 1-year final 
maturity for original issuance of a Treasury SOFR-indexed FRN. Is this 
maturity or another maturity preferable for a Treasury SOFR-indexed 
FRN? Please elaborate.
    3.3. Is a quarterly issuance frequency with two reopenings 
appropriate for a Treasury SOFR-indexed FRN, similar to the existing 
13-week T-bill FRN? What factors should Treasury consider in making 
this decision?
    3.4 When during the month should Treasury auction SOFR-indexed 
FRNs? When should auctions settle?
    3.5 Should interest on Treasury SOFR-indexed FRNs be calculated 
based on a simple average or a compounded average of SOFR? Should 
Treasury consider indexing the security to an average rate based on 
SOFR, such as those recently published by FRBNY as administrator for 
SOFR? \7\ If so, what would be the optimal averaging period for a SOFR-
indexed FRN?
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    \7\ For more information on the SOFR averages, see FRBNY, 
Statement Introducing the SOFR Averages and Index (March 2, 2020), 
available at https://www.newyorkfed.org/markets/opolicy/operating_policy_200302.
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    3.6 What coupon frequency should be used for a Treasury SOFR-
indexed FRN? Note that the existing 13-week T-bill FRN pays coupons 
quarterly. Would a semi-annual, or other coupon frequency be preferred? 
When during the month should coupon and principal payments be made?
    3.7 Should the index rate for a Treasury SOFR-indexed FRN reset 
daily, weekly, or at some other frequency?
    3.8 Should a Treasury SOFR-indexed FRN incorporate a lockout (i.e., 
last k rates for an interest period set at SOFR k days before the 
period ends), a lookback or ``lag'' (i.e., for every day in the 
interest period, use SOFR from k days earlier), or a payment delay 
(i.e., coupon and principal payments made k days after the end of the 
interest period) in its structure? \8\ If so, what values would be 
appropriate for each attribute?

[[Page 31284]]

Please explain relevant considerations for these features.
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    \8\ See ARRC, A User's Guide to SOFR (April 2019), pp. 10-11, 
available at https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2019/Users_Guide_to_SOFR.pdf), and ARRC, ARRC Floating 
Rate Notes Working Group Statement On Use Of The SOFR Index (May 
2020), available at https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/Statement_on_SOFR_Index.pdf.
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    3.9 In light of FRBNY's data contingency procedures for the 
publication of SOFR,\9\ what contingency measures should Treasury 
consider incorporating into the terms of a SOFR-indexed FRN if SOFR, or 
an average rate based on SOFR, is temporarily unavailable or revised?
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    \9\ For additional information, see FRBNY, Additional 
information about the Treasury Repo Reference Rates, available at 
https://www.newyorkfed.org/markets/treasury-repo-reference-rates-information.
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4. Existing 13-Week T-Bill FRN

    4.1 If Treasury decides to issue SOFR-indexed FRNs, what, if any, 
changes should Treasury make to the existing 13-week T-bill FRN 
issuance program?
    4.2 Should Treasury issue FRNs indexed to both indices, or should 
Treasury consolidate FRN issuance on a single index?
    4.3 If there is not sufficient demand for both Treasury FRNs to 
coexist, which index would generate the greater long-term demand and 
better meet Treasury's issuance objectives? Please elaborate.
    4.4 Should Treasury consider issuing 13-week T-bill FRNs with a 1-
year final maturity? How should the decision regarding issuance of 
Treasury SOFR-indexed FRNs affect this possibility?

5. Market Transition

    5.1 What proportion of likely investors is currently operationally 
ready to purchase Treasury SOFR-indexed FRNs? For those investors that 
are not ready, what are the main impediments? How much lead time and 
investment would be required for additional investors to become 
operationally ready to purchase Treasury SOFR-indexed FRNs? Would any 
of the security structure choices mentioned in Section 3 above affect 
the operational readiness of likely investors?
    5.2 To what extent would Treasury's issuance of SOFR-indexed FRNs 
advance the overall market transition away from U.S. dollar LIBOR? How 
would different market segments (e.g., FRNs, derivatives, business 
loans, consumer products) be affected by Treasury's decision to issue 
SOFR-indexed FRNs? What effect would Treasury's issuance of SOFR-
indexed FRNs have on the overall market transition away from LIBOR 
beyond that caused by current issuance of SOFR-indexed FRNs by other 
issuers? Please provide specific details of the cause and effect 
relationships you expect.

Brian Smith,
Deputy Assistant Secretary for Federal Finance.
[FR Doc. 2020-11160 Filed 5-20-20; 4:15 pm]
 BILLING CODE 4810-AS-P