[Federal Register: September 30, 2004 (Volume 69, Number 189)]
[Proposed Rules]
[Page 58755-58766]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30se04-37]
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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
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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 <
opda-sib@bpd.treas.gov>.
E-mail: <opda-sib@bpd.treas.gov>. 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 <opda-sib@bpd.treas.gov> 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 jlackeyj@omb.eop.gov). 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