[Federal Register: November 12, 2002 (Volume 67, Number 218)]
[Rules and Regulations]
[Page 68513-68517]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr12no02-9]
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DEPARTMENT OF THE TREASURY
Fiscal Service
31 CFR Part 356
[Department of the Treasury Circular, Public Debt Series No. 1-93]
Sale and Issue of Marketable Book-Entry Treasury Bills, Notes,
and Bonds; Reporting of Net Long Position and Application of the 35
Percent Limit
AGENCY: Bureau of the Public Debt, Fiscal Service, Department of the
Treasury.
ACTION: Final rule.
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SUMMARY: The Department of the Treasury (``Treasury,'' ``We,'' or
``Us'') is issuing in final form an amendment to the regulation
``Uniform Offering Circular for the Sale and Issue of Marketable Book-
Entry Treasury Bills, Notes, and Bonds.'' This amendment modifies the
net long position (``NLP'') reporting threshold for all Treasury
marketable securities auctions. The threshold, currently $1 billion for
Treasury bill auctions and $2 billion for Treasury note auctions, is
being changed to 35 percent of the offering amount in each auction.
This modification will reduce the number of auction bidders that are
required to report their NLPs, while ensuring that we can still
effectively administer the 35 percent award limit.
The amendment also incorporates certain changes in Treasury's
marketable securities auction program that have already been
implemented. First, the amendment modifies the competitive bid format
for auctions of Treasury cash management bills to conform to a policy
change that was made in April 2002. The current two-decimal bid format
is being changed to three decimals in .005 percent increments, which is
the format in all other Treasury bill auctions.
Second, the amendment makes several changes to reflect the current
treatment in all Treasury marketable securities auctions of bids from
Federal Reserve Banks for their own accounts and for the accounts of
foreign and international monetary authorities. Specifically, the
amendment deletes the defined term ``public offering,'' adds ``offering
amount'' as a new defined term, revises the definition of ``bid-to-
cover ratio,'' and makes conforming changes within the text of the
Uniform Offering Circular. These changes make the terminology
consistent between the Uniform Offering Circular and auction offering
announcements.
EFFECTIVE DATE: December 12, 2002.
ADDRESSES: You may download this final rule from the Bureau of the
Public Debt's Web site at www.publicdebt.treas.gov. It is also
available for public inspection and copying at the Treasury Department
Library, Room 1428, Main Treasury Building, 1500 Pennsylvania Avenue,
NW., Washington, DC 20220. To visit the library, call (202) 622-0990
for an appointment.
FOR FURTHER INFORMATION CONTACT: Lori Santamorena (Executive Director),
Chuck Andreatta (Senior Financial Advisor), or Lee Grandy (Associate
Director), Bureau of the Public Debt,
[[Page 68514]]
Government Securities Regulations Staff, (202) 691-3632.
SUPPLEMENTARY INFORMATION: The Uniform Offering Circular, in
conjunction with the offering announcement for each auction, provides
the terms and conditions for the sale and issuance to the public of
marketable Treasury bills, notes, and bonds.\1\ In this document, we
provide some background on the NLP and its reporting requirements. Next
we discuss the public comments we received in response to an Advance
Notice of Proposed Rulemaking (``ANPR'') regarding NLP reporting,
published on April 29, 2002.\2\ We then describe the final amendment.
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\1\ The Uniform Offering Circular was published as a final rule
on January 5, 1993 (58 FR 412). The Uniform Offering Circular, as
amended, is codified at 31 CFR Part 356.
\2\ 67 FR 20934 (April 29, 2002).
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I. Background on Net Long Position Reporting
One of the requirements of the Treasury auction process is the
reporting of NLPs, which we use to limit the amount that we will award
to any one bidder in an auction (``the 35 percent rule''). This rule
ensures that awards in our auctions are distributed to a number of
auction participants. This goal of broad distribution is intended to
encourage participation by a significant number of competitive bidders
in each auction. Broad participation keeps our borrowing costs to a
minimum, helps ensure that Treasury auctions are fair and competitive,
and makes it less likely that ownership of Treasury securities will
become overly concentrated.
A bidder in an auction must report its NLP if, in the security
being auctioned, the bidder's NLP plus its bids in the auction meet or
exceed a certain dollar-amount threshold as stated in the security's
offering announcement. The NLP reporting threshold currently is $1
billion for Treasury bills and $2 billion for Treasury notes. In
addition, if the sum of a bidder's bids equals or exceeds the NLP
reporting threshold, but the bidder has no position or has a net short
position, it must report an NLP of zero. A bidder must determine its
NLP as of one-half hour prior to the deadline for receipt of
competitive bids. If a bidder meets or exceeds the reporting threshold
as of the NLP determination time in the auction offering announcement,
the bidder must report its NLP prior to the competitive bidding
deadline.
The NLP is generally the amount of the security being auctioned
that a bidder has obtained, or has arranged to obtain, outside of the
auction in the secondary market. The components of the NLP are intended
to capture the various ways that a bidder can acquire a Treasury
security.\3\ The term ``net long'' refers to the extent to which an
investor has bought (or has agreed to buy) more of a security than it
has sold (or has agreed to sell). For example, if an investor has
bought $900 million of a security in the when-issued market, and it has
sold $300 million of the same security in the when-issued market, it
has a net long position of $600 million in that security, assuming it
has no other positions.
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\3\ See 31 CFR 356.13(b) for details on the components of the
NLP. See also the amendment to the Uniform Offering Circular
published on November 13, 2001 (66 FR 56759), which provided an
optional exclusion amount in the NLP calculation for reopenings.
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We published an ANPR for public comment on April 29, 2002,\4\ to
solicit comments on four alternatives for addressing the half-hour time
lag between the time as of which the NLP is calculated (the ``NLP as-of
time'') and the competitive bidding deadline. It was pointed out in the
ANPR that, because a bidder's NLP can change significantly during this
time period, the reported NLP may not provide an accurate, or even
approximate, measure of a bidder's position at the time that a bidder
actually submits its bids. As a result, a bidder's award may be cut
back to the 35 percent award limit based on NLP information that no
longer reflects the bidder's actual NLP. Conversely, a bidder's award
may not be cut back if it builds a large position in the security being
auctioned between the NLP as-of time and the competitive bidding
deadline. We also stated in the ANPR that we were more fundamentally
reconsidering the rule. In addition, we invited comments on potential
changes to the NLP reporting threshold amount, and indicated that we
were considering changes in this area regardless of whether or not we
implement any modifications to the NLP as-of reporting timeframes.
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\4\ See supra, note 2.
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The four alternatives were as follows:
Alternative 1: Reduce the half-hour interval between the NLP as-of
time and the competitive bidding deadline.
Alternative 2: Make the NLP as-of time the same as the competitive
bidding deadline, with the NLP reporting time to follow (for example,
one-half hour later). Bidders would be responsible for ensuring that
their bids plus their positions, if they are net long, do not exceed
the 35 percent award limit.
Alternative 3: Eliminate the NLP reporting requirement, and either
maintain or reduce the 35 percent limit. Treasury would rely on its
Large Position Reporting rules \5\ and other mechanisms to monitor the
market and address concentrations of ownership.
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\5\ 17 CFR 420.
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Alternative 4: Retain both the 35 percent limit and the NLP as-of
and reporting timeframes as they exist now.
Potential change to NLP reporting threshold amount. Regarding this
potential change, we stated in the ANPR that we are considering
changing the NLP reporting threshold from $1 billion for Treasury bills
and $2 billion for Treasury notes to the actual 35 percent award limit
for each auction. This rule change would apply to all marketable
Treasury securities auctions. We also stated that we would provide the
35 percent award limit on the auction offering announcement in each
auction. Bidders whose bids plus NLPs equal or exceed the limit would
be required to report their positions. For example, if the 35 percent
award limit for a particular auction is $3 billion, and the total of a
bidder's bids is $2.5 billion and its NLP is $1 billion, the bidder
would have to report its $1 billion NLP. Bidders whose bids plus NLPs
do not equal or exceed the limit would not be required to report any
positions. Bidders whose total bids equal or exceed the limit but
either have no position or a net short position would not have to
report a zero as their NLP.
II. Comments Received in Response to the Advance Notice of Proposed
Rulemaking
We received one comment in response to the ANPR, which was from The
Bond Market Association (TBMA).\6\ The commenter recommended that we
make three changes to the NLP rules.
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\6\ The ANPR and comment letter, dated June 27, 2002, are
available for downloading on the Internet, and for inspection and
copying at the Treasury Department Library at the addresses provided
earlier in this final rule.
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First, TBMA supported Alternative 1 by advocating reducing the
half-hour interval between the NLP as-of time and the competitive
bidding deadline. Specifically, the commenter suggested requiring
bidders to calculate their NLPs as of 12:40 p.m. rather than 12:30 p.m.
TBMA stated that this modification would take advantage of
technological advances by dealers while still ensuring the accuracy of
submitted bids and NLPs. The commenter pointed out a disadvantage of
this alternative, which is, ``Because auction support staff will have
less time to work with, there is certainly the possibility that
Treasury
[[Page 68515]]
may initially see a small spike in the number of NLP submission
errors.'' The commenter opposed providing bidders with less than 20
minutes to determine, verify and report their NLPs, primarily because
``moving the time up further would put substantial strain on existing
personnel,'' particularly for those securities dealers with numerous
domestic and foreign affiliates.
Second, TBMA strongly supported modifying the NLP reporting
thresholds for bill and note auctions to 35 percent of the issuance
amount, because it would ``better capture only those bidders that are
most likely to exceed the 35 percent limit.'' The commenter maintained
that the current reporting thresholds are ``unnecessarily low'' and
that, ``Any benefit Treasury derives from maintaining a low reporting
threshold is outweighed by the additional bidder submission errors that
result.''
Third, TBMA recommended that we discontinue requiring bidders to
report a zero NLP when their bids equal or exceed the applicable
reporting threshold but they have either no net long position or a net
short position. The commenter advocated that such bidders be given the
choice of either reporting a zero NLP or leaving the field blank. TBMA
acknowledged that, ``requiring bidders to report their negative NLP as
zero does theoretically act as a check that a bidder realized that it
was over the threshold.'' However, TBMA asserted that inadvertent
failures by bidders to report a zero have resulted in ``serious
violation letters'' from Treasury, where in fact such instances are ``a
technical violation of the auction rules that in no way could have
impacted the results of the auction.''
In addition to the modifications it favored, TBMA also advised
against adopting either Alternative 2 or 3. In particular, TBMA argued
against post-auction reporting of NLPs (Alternative 2), primarily
because it would discourage aggressive bidding since ``large bidders
would have to allow themselves a substantial `margin for error' with
respect to the 35 percent rule.''
III. Amendment to the Rule
Net Long Position Reporting Threshold
After considering the comment letter we received, we are modifying
the NLP reporting threshold to 35 percent of the offering amount in
each auction. We agree with the commenter that this change will more
precisely apply only to those bidders whose bids are most likely to
equal or exceed the 35 percent award limit in an auction. Accordingly,
Sec. 356.13(a) is revised to reflect that the net long position
reporting threshold amount will be 35 percent of the offering amount.
The NLP reporting threshold will be provided on the offering
announcement for each auction.
We are not considering any other changes to the NLP reporting
requirement at this time. The NLP as-of reporting time will continue to
be one half-hour prior to the deadline for receiving competitive bids.
We agree with TBMA that shortening this time interval could result in
an increase in NLP reporting errors. Since shortening the time interval
to 20 minutes would still leave a significant time period in which
bidders' positions in the securities being auctioned could change
significantly prior to the deadline for receiving competitive bids, we
believe that the disadvantages of a likely increase in NLP reporting
errors outweigh the benefits of a shorter time period for calculating
and reporting NLPs.
We also have decided to maintain the requirement for bidders to
report an NLP of zero when their bids equal or exceed the applicable
reporting threshold but they have either no net long position or a net
short position. We believe that this requirement acts as an important
check to ensure that bidders with very large bids in an auction
calculated their NLPs for possible reporting in the auction.
Conforming Technical Changes
We are also making a conforming technical change to Sec.
356.12(c)(1)(i) of the auction rules to reflect that competitive bids
in all cash management bill auctions must now be expressed as a
discount rate with three decimals in increments of .005 percent, for
example, 3.100%, 3.105%.\7\ This change will make the competitive bid
format for cash management bills the same as for all other types of
Treasury bills. This change will enable competitive bidders to better
fine-tune their bids in cash management bill auctions.
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\7\ Treasury announced this policy change in a Press Release
dated April 2, 2002, that announced several offerings of cash
management bills. Subsequent cash management bill offering
announcements also stated this bidding requirement. The offering
announcement governs in cases where it is inconsistent with the
Uniform Offering Circular. (See Sec. 356.10)
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We are deleting from Sec. 356.12 the defined term ``public
offering'' and adding the defined term ``offering amount.'' In the
past, ``public offering'' had a different meaning from ``offering
amount'' as used on the offering announcement because of the treatment
of amounts bid by the Federal Reserve's System Open Market Account
(SOMA) and by foreign and international monetary authorities (FIMA). In
March 1997, Treasury announced that awards to SOMA in Treasury bill
auctions would be treated as additions to the announced offering
amount, the same treatment as for note and bond auctions.\8\ Since
February 2001, when specific noncompetitive bidding and award
limitations were placed on FIMA accounts,\9\ awards to FIMA accounts
are made within the offering amount, as are those to the public in
general. Since these changes, the treatment of FIMA and SOMA is
consistent for all Treasury securities auctions. Awards to SOMA are
made in addition to the offering amount; FIMA awards are within the
offering amount.
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\8\ Treasury Press Release dated March 18, 1997.
\9\ The policy change was announced in a Treasury Press Release
dated November 14, 2000, and became effective on February 1, 2001.
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The definition of ``public offering'' in Sec. 356.2 is no longer
accurate to the extent that the definition continues to exclude FIMA
bids up to the amount of maturing securities in those accounts. Since
there is no longer any difference in the meaning of ``public offering''
and ``offering amount,'' and the offering announcements use the term
``offering amount,'' we are deleting the term ``public offering'' and
adding the term ``offering amount'' to the Uniform Offering Circular,
and making conforming changes within the text. One of these conforming
changes is to the definition of ``bid-to-cover ratio,'' which
previously excluded both SOMA and FIMA bids and awards, and now only
excludes SOMA bids and awards.
Finally, this amendment incorporates technical changes in
Sec. Sec. 356.20 and 356.21 to conform to our policy for prorating
competitive bids at the highest accepted yield or discount rate. In the
weekly bill auctions of April 30, 2001, we changed the rounding
convention for the allocation percentage from rounding up to the next
whole percentage point to rounding up to the next hundredth of a whole
percentage point.
IV. Procedural Requirements
This final rule is not a significant regulatory action for purposes
of Executive Order 12866. Although we issued an Advance Notice of
Proposed Rulemaking on April 29, 2002, to benefit from public comment,
the notice and public procedures requirements of the Administrative
Procedure Act do not apply, under 5 U.S.C. 553(a)(2).
Since no notice of proposed rulemaking is required, the provisions
[[Page 68516]]
of the Regulatory Flexibility Act (5 U.S.C. 601 et seq.) do not apply.
The collections of information in this final rule amendment have
been previously approved by the Office of Management and Budget in
accordance with the Paperwork Reduction Act of 1995. This final rule is
technical in nature and imposes no additional burdens on auction
bidders.
List of Subjects in 31 CFR Part 356
Bonds, Federal Reserve System, Government securities, Securities.
For the reasons stated in the preamble, 31 CFR Part 356 is amended
as follows:
PART 356--SALE AND ISSUE OF MARKETABLE BOOK-ENTRY TREASURY BILLS,
NOTES, AND BONDS (DEPARTMENT OF THE TREASURY CIRCULAR, PUBLIC DEBT
SERIES NO. 1-93)
1. The authority citation for Part 356 continues to read as
follows:
Authority: 5 U.S.C. 301; 31 U.S.C. 3102 et seq.; 12 U.S.C. 391.
2. Section 356.2 is amended by removing the definition of ``Public
offering,'' revising the definition of ``Bid-to-cover ratio,'' and
adding the defined term ``Offering amount'' between the defined terms
``Noncompetitive bid'' and ``Par'' to read as follows:
Sec. 356.2 Definitions.
* * * * *
Bid-to-cover ratio means the total par amount of securities bid for
by the public divided by the total par amount of securities awarded to
the public. The bid-to-cover ratio excludes any bids or awards for the
account of the Federal Reserve Banks.
* * * * *
Offering amount means the par amount of securities offered to the
public for purchase in an auction, as specified in the offering
announcement.
* * * * *
3. Section 356.12 is amended by revising paragraphs (c)(1)(i) and
(c)(2) to read as follows:
Sec. 356.12 Noncompetitive and competitive bidding.
* * * * *
(c) Competitive. * * *
(1) Bid format--(i) Treasury bills. A competitive bid must show the
discount rate bid, expressed with three decimals in .005 percent
increments. The third decimal must be either a zero or a five, e.g.,
5.320 or 5.325. Fractions may not be used.
* * * * *
(2) Maximum recognized bid. There is no limitation on the maximum
dollar amount that a bidder may bid for competitively, either at one
yield or discount rate, or at different yields or discount rates.
However, a competitive bid at a single yield or discount rate that
exceeds 35 percent of the offering amount will be reduced to that
amount. For example, if the offering amount is $10 billion, the maximum
bid amount that will be recognized at any one yield or discount rate
from any bidder is $3.5 billion. (See Sec. 356.22 for award
limitations.)
4. Section 356.13 is amended by revising paragraph (a) to read as
follows:
Sec. 356.13 Net long position.
(a) Reporting net long positions. When bidding competitively, a
bidder must report the amount of its net long position when the total
of all of its bids in an auction plus the bidder's net long position in
the security being auctioned equals or exceeds the net long position
reporting threshold amount. The net long position reporting threshold
amount for any particular security will be stated in the offering
announcement for that security. (See Sec. 356.10.) That amount will be
35 percent of the offering amount, unless otherwise stated in the
offering announcement. If the bidder either has no position or has a
net short position and the total of all of its bids equals or exceeds
the net long position reporting threshold amount, a net long position
of zero must be reported. In cases where a bidder that is required to
report the amount of its net long position has more than one bid, the
bidder's total net long position should be reported in connection with
only one bid. A bidder that is a customer must report its reportable
net long position through only one depository institution or dealer.
(See Sec. 356.14(c).)
* * * * *
5. Section 356.20 is amended by revising paragraph (a) to read as
follows:
Sec. 356.20 Determination of auction awards.
(a) Determining the range and amount of accepted competitive bids--
(1) Accepting bids. Determinations of awards in auctions are made after
the closing time for receipt of bids. In determining auction awards,
all noncompetitive bids received by the closing time specified in the
offering announcement are accepted in full. Then competitive bids are
accepted, starting with those at the lowest yields or discount rates
through successively higher yields or discount rates, up to the amount
required to meet the offering amount. Bids at the highest accepted
yield or discount rate will be prorated (as described in paragraph
(a)(2) of this section), if necessary. If the amount of noncompetitive
bids would absorb most or all of the offering amount, competitive bids
will be accepted in an amount determined by Treasury to be sufficient
to provide a fair determination of the yield or discount rate for the
securities being auctioned.
(2) Accepting bids at the high yield or discount rate. When the
total amount of bids at the highest accepted yield or discount rate
exceeds the amount of the offering amount remaining after acceptance of
noncompetitive bids and competitive bids at the lower yields or
discount rates, a percentage of the bids received at the highest
accepted yield or discount rate will be awarded. This proration is
performed for the purpose of awarding a par amount of securities close
to the offering amount. The percentage is derived by dividing the
remaining par amount needed to fill the offering amount by the par
amount of the bids recognized at the high yield or rate and rounding up
to the next hundredth of a whole percentage point, for example, 17.13%.
* * * * *
6. Section 356.21 is amended by revising paragraph (a) and the
second sentence of paragraph (b) to read as follows:
Sec. 356.21 Proration of awards.
(a) Awards to submitters. In auctions where bids at the highest
accepted yield or discount rate are prorated under Sec. 356.20(a)(2)
of this part, the Federal Reserve Banks are responsible for prorating
awards for submitters at the percentage announced by the Department.
For example, if 80.15% is the announced percentage at the highest yield
or discount rate, then each bid at that rate or yield shall be awarded
80.15% of the amount bid. Hence, a bid for $100,000,000 at the highest
accepted yield or discount rate would be awarded $80,150,000. In all
cases, awards will be for at least the minimum to hold, and awards must
be in an appropriate multiple to hold. Awards at the highest accepted
yield or rate are adjusted upwards, if necessary, to an appropriate
multiple to hold. For example, Treasury bills may be issued with a
minimum to hold of $1,000 and multiples of $1,000. Where an $18,000 bid
is accepted at the high discount rate, and the percent awarded at the
high discount rate is 88.27%, the award to that bidder will be $16,000,
representing an upward adjustment from $15,888.60 ($18,000 x .8827) to
an appropriate multiple to hold. If tenders at the
[[Page 68517]]
highest accepted discount rate are prorated at, for example, a rate of
4.65%, the award for a $10,000 bid will be $1,000, instead of $465, in
order to meet the minimum to hold for a bill issue.
(b) Awards to customers.* * * For example, if 80.15% is the
announced percentage at the highest yield or discount rate, then each
customer bid at that rate or yield shall be awarded 80.15%.* * *
7. Section 356.22 is amended by revising paragraph (b) to read as
follows:
Sec. 356.22 Limitation on auction awards.
* * * * *
(b) Awards to competitive bidders. The maximum award that will be
made to any bidder is 35 percent of the offering amount less the
bidder's net long position as reportable under Sec. 356.13. For
example, in a note auction with a $10 billion offering amount, a bidder
with a reported net long position of $1 billion could receive a maximum
auction award of $2.5 billion. When the bids and net long positions of
more than one person or entity must be combined as required by Sec.
356.15(c), such combined amount will be used for the purpose of this
award limitation.
Dated: November 5, 2002.
Donald V. Hammond,
Fiscal Assistant Secretary.
[FR Doc. 02-28662 Filed 11-8-02; 8:45 am]
BILLING CODE 4810-39-P