SECURITIES AND EXCHANGE COMMISSION

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON. D.C. 20549

,'SION OF

~..

,iT MANAGEMENT

October 3, 1997

Craig S. Ty Ie, Esquire

General Counsel

Investment Company Institute

1401 H Street, N.W.

Washington, D. C. 20005-2148

AC ~vN0o-:Co~A-cl

SECON I--) -­

RUL

l7t-'f

pULl

l tr J- 17

AVAJ.A fl

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Dear Mr. Tyle:

In your letter dated July 9, 1997 on behalf of the Investment Company Institute, you

requested that the Commission make a "techncal modification" to rule 17f-4(b)(2) (17 CFR

17f-4(b)(2)) under the Investment Company Act. The modification you proposed would

update the rule to reflect regulations the U.S. Department of the Treasury recently

270.

promulgated concernng the book-entry system for U.S. Governent securities. As we

discussed on October 2, 1997, you have asked that we treat your letter as a request for noaction assurance until the Commission next amends rule 17f-4.

Rule 17f-4(b )(2) provides that, subject to certain conditions, a registered management

investment company ("fund") and its qualified custodian may deposit the fund's portfolio

securities in the federal book-entry system. The rule, adopted in 1978, identifies that system

as:

the book-entry system as provided in Subpart 0 of Treasury Circular No. 300,

31 CFR 306, Subpart B of 31 CFR Part 350, and the book-entry regulations of

federal agencies substantially in the form of Subpart 0 . . . .

On August 16, 1996, the U.S. Departent of the Treasury adopted new regulations

concerng the Treasury/Reserve Automated Debt Entry System ("TRAES").l The

TRADES regulations replaced the regulations referred to

in rule 17f-4(b)(2), effective

See Regulations Governing Book-Entry Treasury Bonds, Notes and Bils, Department of the

Treasury Circular, Public Debt Series, No. 2-86, 61 FR 43626 (Aug. 23, 1996). The adopting

release states that the new regulations "incorporateD recent and significant changes in commercial law

addressing the holdings of securities in book-entry form through financial intermediaries. . . (and)

replaceD existing Treasury regulations that contain outdated legal concepts." ¡d.

Craig S. Tyle, Esq.

October 3, 1997

Page 2

January 1, 1997.2 The TRADES regulations are codified at 31 CFR Part 357, Subpart B.

You state that other federal agencies and governent-sponsored enterprises that issue bookentry securities and use the Federal Reserve Banks' book-entr facilties also have adopted

new regulations substantially in the form of the TRADES regulations rather than former

Subpart O.

As you point out, the identification of the federal book-entry system in rule

17f-4(b)(2) has become outdated as a result of these regulatory developments. The Division

believes that the Commission generally intended, when it adopted rule 17f-4 in 1978, to

incorporate by reference future revisions of regulations governng the federal book-entry

system, provided that these revisions would not materially increase risks to fund assets

maintained in the system.

The Division is considering recommending to the Commission that it propose

amendments to rule 17f-4 that would address this issue, as well as other more significant

developments that affect the rule. Pending possible future amendments to rule 17f-4, the

Division would not recommend enforcement action to the Commission against any fund or

custodian that maintains fund assets in accordance with the requirements of rule 17f-4 in the

federal book-entry system described in the TRADES regulations, or described in other

federal agency or governent sponsored enterprise regulations that are substantially in the

form of the TRADES regulations.

Sincerely,

¡J 2 ;J~

Robert E. Plaze

Associate Director

2 The TRADES regulations rescinded former Part 350 and replaced the pertinent portion of

Subpart 0 of Part 306 with new Subpart B of Part 357.

INVESTMENT COMPANY INSTITUTE

I!

\¡,~AIG S. TYLE

!ICE PRESIDENT & SENIOR COUNSEL

SECURITIES AND FINANCIAL REGULATION

July 9, 1997

Barry P. Barbash, Esq.

Director

Division of Investment Management

Securities and Exchange Commssion

.

Room 10065 Stop 10-6

450 Fifth Street, N.W.

Washington, DC 20549

Re: Proposed Revision to Rule 17f-4(b )(2),

Defing the Federal Book-Entr System

Dear Mr. Barbash:

The Investment Company Institute! is writig to request that a techncal modification be

made to Rule 17f-4(b)(2) under the Investment Company Act of 1940 in order to update the

citation therein to the Treasur Department's book-entr securties regulations.

Rule 17f-4(b )(2) provides that, subject to certai conditions, registered investment

companies and their qualfied custodian may deposit an investment company's securities in

the federal book-entr system. In light of the fact that most U.S. Treasury securities and the

securities of many U.S. governent agencies are issued exclusively in book-entr form, the

authority to utilize the federal book-entr system pursuant to Rule 17f-4(b )(2) is essential to the

investment or cash management operations of nearly al investment companes.

The current language of Rule 17f-4(b )(2), however, refers to the federal book-entry

system as being:

lithe book-entr system as provided in Subpar 0 of Treasur Circular No. 300,

31 CFR 306, Subpart B of 31 CFR Part 350, and the book-entr regulations of

federal agencies substantially in the form of Subpart 0.. ."

On January 1,1997, the Treasur Deparent's revised reguations for.the

Treasury /Reserve Automated Debt Entr System ("TRADES") became effective.2 The TRADES

1 The Investment Company Institute is the national association of the Amencan investment company industr. Its

membership includes 6/543 open-end investment companies ("mutual fuds"), 445 closed-end investment companes

and 11 sponsors of unit investment trsts. Its mutual fud members have assets of about $3.849 mIlon, accounting

for approximately 95% of total industr assets, and have over 59 milion individual shareholders.

1401 H STREET. NW . WASHINGTON. DC 20005-2148 . 202/326-5815 . FAX 202/326-5827

Barr P. Barbash, Esq.

July 9, 1997

Page 2

regulations deleted former Part 350 and replaced the pertent portion of Subpart 0 of Part 306

with new Part 357, Subpart B. Similarly, all of the governent sponsored enterprises that issue

book-entr securities and utilize the Federal Reserve

Banks' book-entr facilities also have

adopted new reguations that are "substantially in the form of" TRADES, rather than the old

Subpart 0.3 Thus, the language in curent Rule 17f-4(b)(2) has become obsolete.

We believe that it is clear that Rule 17f4(b)(2) is intended to authorize registered

investment companies and their custodians to utilize the federal book-entr system.

Nevertheless, to elimiate the possibilty of confsion or uncertainty, we request that a

techncal correction to the Rule be made at the Commssion's earliest opportuty.

To effect such a correcton, we suggest that Rule 17f-4(b)(2) be amended to read as

follows:

"(2) the Treasur/Reserve Automated Debt Entr System (TRADES), as

provided for in 31 CFR Part 357, Subpart B, or any successor provision thereto,

or another automated book-entr system operated by the Federal Reserve Ban

pursuant to the reguations of federal agencies or instrmentalities that are

substantially simiar to such Subpart B or successor provision thereto."

We would be pleased to discuss ths proposed change with you at any time. If you have

any questions, please call Amy Lancellotta at 202/326-5824 or the undersigned at 202/326-5815.

Sincerely yours,

7 \.~i;

/" ~

Craig S. Tyle

Vice President & Senior Counel

cc: Robert E. Plaze

t

2 A copy of the Treasur Departent's adoptig release, as publihed in 61 FR 43626 (Augut 23,1996), is attached

for your convenience. .

3 These government sponsored enterpnses and the related reguations are as follows: (1) the Federal National

Mortgage Assocation and the Federal Home Loan Mortgage Corporation (Reguations of the Departent of

Housing and Urban Development, 61 Fed. Reg. 63944); (2) the Federal Home Loan Bank (Reguations of the Federal

Housing Finance Board, 61 Fed. Reg. 64021); (3) the Farm Credit Ban, the Federal Agncultual Mortgage

Corporation and the Farm Credit System Financial Assistance COloration (Reguations of the Farm Credit

Admistration 61 Fed. Reg. 67188); (4) the Resolution Funding Corporation (Regulations of the Thft Depositor

Protecon Control Board 61 Fed. Reg. 66874); (5) the Student Loan Mortgage Assocation (Regulations of the

Departent of Treasur's Bureau of Public Debt, Fiscal Service, 62 Fed. Reg. 621); and (6) the Tennessee Valley

Authonty (62 Fed. Reg. 920).

:)

,

43626

Federal Register / Vol. 61, No. 165 / Friday. August 23. 1996 / Rules and Regulations

DEPARTMENT OF THE TREASURY

TRES in the Code of Federal

Fiscal Service

Regulations. This commentar can be

fowid in Appendix B.

31 CFR Part 357

Comments from several persons

overlapped and those comments

(Department of the Treasury Circular. Public

addrssed thee general areas:

Debt Series, No. 2-861

Regulations Governing Book-Entry

Treasury Bonds, Notes

and Bils.

AGENCY: Bureau of the Public Debt,

Fiscal Service, Treasur.

ACTION: Final rule.

SUMMARY: The Deparent of the

Treasur is publishing a final rule that.

questions, ho\vever, were raised about

final TRAES rule; and

(3) The need for fuer explanation

and clanfication. especially the

EFFECTIVE DATE: January 1. 1997. The

incorporation by reference of certain

publications listed in the regulations is

investors in Treasur secunties. In

notice rearding acceptance of state

enactments of Revised Aricle 8;

(2) Coordination as to timeframes and

notices to faciltate revision and

issuance of parallel rules for book-entr

secunties of Governent Sponsored

govern Treasury bonds, notes, and bils

financial intermediaries. The rule

replaces existing Treasur regulations

that contain outdated legal concepts.

Commenters generally supported

Treasury's conclusion that unfOrmty

was important for the market and

addition commenters were supportve of

the use of Revised Artcle 8 to achieve

this uniformitv. Thr different

Enterpnses (GSEs) to conform to the

secunties in book-entr form through

Revised Artcle 8.

(1) The scope of federal preemption

and related issues involving state

varations on Revised Aricle 8 of the

UCC as well as Treasur procedures and

on and after the effective date. wil

(Treasury securities) in book-entr form

held in the commercial book-entry

system. The rule incorporates recent

and significant changes in commercial

law addressing the holdings of

choice of law rule had not adopted

inclusion of hypotheticals. to ilustrate

how TRADES wil apply to a varety of

transaction scenarios of varing

complexity, including the application of

the féderallaw to transactions involving

clearng bans.

II. General Comment Discussion

In the March 4 proposal. Treasury set

the maner in which Treasur achieved

unformity and used Revised Article 8.

A. Federa Preemption

First. 5 commenters questioned

whether §§ 357.10(c) and 357.11(d) were

intended to be a complete or limited

preemption of a state's law if the state

had not adopted Revised Aricle 8. As

set fort in the Marh 4 release. the

preemption in TRES is limited. See

the commentary in Appendix B. In

order to clarfy this issue, Treasury has

adopted language in both §§ 357.10(c)

and 357.1l(d) suggested by a cotnmenter

to make the limited nature of the .

preemption clearer. This language

provides that. if a state has not adopted

fort its conclusion that. because of the

Revised Article 8. that state's laws shall

approved by the Director of

size and importance of the Treasury

be viewed as though that state had

FOR FURTHER INFORMATION CONTACT:

market. unformity of treatment of

holders of interests in Treasury

securities was essential. In addition,

the Federal

Register as ofJanuary 1. 1997.

Walter T. Eccard. Chief Cowisel (202)

219-3320, or Cynthia E. Reese, Deputy

Chief Cowisel, (202) 219-3320. Copies

of the final rule are being made

available for downloading from the

Bureau of the Public Debt home page at

the following address:

http:\\www.ustreas.gov/treasury/

bureaus/ pubdebtlpubdebt.html.

SUPPLEMENTARY INFORMATION:

I. Background

On March 4, 1996. the Deparent

published a proposed rule that would

govern secuntíes held in the

commercial book-entr system. now

referred to as the Treasur/Reserve

Automated Debt Entr System

("TRAES"). 61 FR 8420. Eleven

written comment letters were received

in response to that proposed rule. All

but one of the comment letters were

very supportive of the proposed rule.

Most commenters recommended

adoption ~f the proposed rule with

various suggested clarifications. The

Departent fowid the comments

extmely useful in makg the

revisions described herein. Although

some minor comments are not

addressed, all comments have been

considered in the formulation of this

final rule.

As indicated in the March 4 release.

Treasury wil include commentar on

adopted Revi'ed Article 8.

Second, 4 commenters noted that

while in the discussion section of the

Treasury set fort in some detail the

March 4 release Treasur stated that

reasons it had concluded that Revised

Article 8 was an appropriate vehicle to

use to obtain that wiiformity. As of

March 4. 13 states had adopted Revised

Article 8. As of the date of

this release

28 states i have adopted Revised Aricle

8 and it has been introduced in 4

additional states and the Distrct of

minor variations made by a state in

adopting Revised Article 8 would not

Columbia.2 This remarkable progress

reflects strong support for the legal

concepts set fort in Revised Arcle 8

and supports Treasur's decision to base

TRAES on Revised Article 8, which is

incorporated by reference in this final

rule.

In the March 4 release. Treasur

proposed achieving uniformity for

Treasury secunties in two ways. First.

Section 357.10(a) established a rule of

Federal preemption in descnbing the

Treasury and

the Federal Reserve Bans. Second,

nghts and obligations of

TRDES established a choice of law

rule that mandated use of Revised

Article 8 in the event the state

determined by the application of the

i Alabama. Alaska. Arizona. Arkansas. Colorado.

Idaho. Iowa. lI/inois. Indiana. Kansas, Kentucky.

Louisiana. Maryland. Massachusetts. Minnesota.

Mississippi. Nebraska. New Mexico. Oklahoma.

Oregon. Pennsylvania. Texas. Utah. Vermont.

Virginia. Washington. West Virginia. Wyoming.

'California. District ofColumbia. Hawaii. New

York. Ohio.

affect Treasury's conclusion that a state

had adopted Revised Aricle 8, the

language of the proposed rule had no

similar qualification. Furter.

commenters noted that while the

standard in the commentarv seemed

appropriate. determination"of what

constituted minor varations could be

diffcult. In response to these comments,

and in an attempt to provide certainty;

Treasur is taking the following actions.

Treasury' has reviewed the form of

Revised Article 8 adopted by the 28

statesJ that have adopted Revised

Article 8 as of the date of this release

and has concluded that the changes

made by these states indeed ar minor.

Therefore. Treasury has concluded that

they all are substantially similar to

Revised Article 8. Accordingly, if either

§ 357.10(b) or 357.1l(a) directs a person

to one of these 28 states. the pro\'isions

of §§ 357.10(c) and 357.11(d) are not

applicable. In addition, as additional

states adopt Revised Aricle 8, Treasury

wil. after review of the statute, publish

in the Federal Register a notice setting

fort its conclusion as to whether

§§357.10(c) and 357.11(d) remain

applicable to those states.

'See NOle ! supro.

Federal Register I Vol. 61, No. 165 I Friday, August 23, 1996 I Rules and Regulations

Third, a commenter raised a question

of what Treasur would do in the event

a state adopted Revised Arcle 8 and

then subsequently amended Revise.d

Artcle 8 in a fashion that resulted in an

unsatisfactory lack of uniformity:

Treasur believes such an event is

unlikely. In addition, ?nc~ Treasury has

anounced its determination tht a state

has adopted Revised Article 8, the

market is entitled to rely on-that

decision.4 Nonetheless, if such an

unlikely event were to occur, Treasury

has the authority to take the action that

would result in §§ 357.10(c) and

357.11(d) (or

their equivalent) being

reapplied. Any such action w.ould be

published in the Federal Register.

C. Request for Hypotheticals

Several commenters suggested that

Treasur include in the Commentary to

the final regulations vmous .

book-entr securities. The assumption is

that the substance of any such

substantially

identical to the Treasury proposed rule.

Treasury is working with the GSEs and

regulations will be

their regulators toward the goal of

havina the effective dates of all fial

book-~ntr regulations timed t~

coincide. One commenter specifically

suggested delaying the effective date of

the final TRAES rule to provide

suffcient lead time to GSE issuers.

Treasur understands the market's

desire for simultaneous adoption of

book-entr rules substantially similar to

TRADES for GSEs. While adoption of

rules for GSEs is subject to the control

of the vmous GSEs and the entities that

promulgate their rules, Treasur has

taken several steps to facilitate the

simultaneous adoption of parallel GSE

rules. These steps have included

meetigs with representatives of the

GSEs and their regulators to inform

them 'of the actions Treasur was takig

with respect to TRDES and the .

timetable for adoption of TRES.

Consistent with ths supportve

approach, Treasury has determined that

it wil, at the request of the Federal

Far Credit Ban Funding .

Corporation, delay the effecveness of

TRES. Additional language has been

added to the commentar to clarfy ths

hypotheticals that explan the operation

of Revised Aricle 8. Treasur has

holding in TRSURY DIRCl ar, in

studied those hypothçticals carefully.

practcal terms. the same since both the

and believes that they are very useful in

understanding Revised Aricle 8. In

light of those hypotheticals. and since

TREASURY DlRECl have a direct clai

against the United States.

Article 8 provides nume;ous .

TRAES is based. in lare measure, on

Revised Article 8. Treasur has

concluded that developing

ilustrate what law would apply in

different situations would be usefuL.

Accordingly. the Comi;entar conta~ns

hypotheticals to explain the interaction

of federal and state law.

III. Other Comments

In addition to the general comments

described above, Treasur received a

. number of other comments. Many of

these included technical drafting

the tiered nature of the commercial

book-entr system and indicated that

investors may

not be aware of how the

commercial book-entry system works.

Treasur agrees that it is important that

investors understand the operation of

both the book-entr system and

being revised. which could lead .10 the res~lt.lhat

a stale could adopt differenl Article 9 provisions

:ban are included in the Anicle 8 conforming

amendments. Tresury does not anticipale that such

an event would result in the need t.o reapply

§§ 357.10(c) and 357.1I(dJ.lf that were necessary.

Treasury would talce the same action. after notice.

as described herein.

certain'other draftng changes to the

definitions. Those suggestions mainly

clarfy the meanng intended by

Treasur in the Marh release and were

adopted. In adopting these draftg

Article 8. By adding this term, Treasur

is able to adopt the suggestions that it

delete the general incorporation

reference in the defiiution section that

appeared in the March release. Secton

357.2 is complete and reference to other

definitions is unnecessar.

One commenter found the language of

§ 357.10(b) unclear and proposed

drafting suggestions to clarify its.

meaning. Section 357.10(b) decribes the

law that governs secunty interests

Commentary, anct hypotheticals .

included in the commentar. explain

how § 357.10(b) works. In addition

Treasury has redrafted § 357.10(b) in

order to make its meaning clearer.

Several comments stated that

TRES. The discussion in the March

4 Proposed Rule was designed to

promote that understanding. In

Treasur agres with this comment and

Section 9-103(6)(0 of Revised Arcle 8.

addition. the inclusion of a commentary

has made changes to § 357.11(c). In

Regulations is another effort to promote

an understading of both TRDES and

appropriate to delete rereren~e to

prionty so that, as provided in

on "IES in the Code of Federal

the book-entr system. Furermore.

Treasur plans to contiue its investor

the term "Security Entitlement" to

descnbe the interest of a Parcipant in

. One commenter noted ihat Micle 9 is current! y

One commenter proposed addig a

new defined term, "State." ~d m~de

§357.11(c) should be modified to

conform to the choice of law rule in

to TRADES to be in place for GSEs by

TRADES.

Parcipant and the person holdig in

suggestions.

.

One commenter noted concerns with granted to Federal Reserve Banks. The

education efforts in the coming months.

One commenter questioned the use of

the effective ?ate of

fuer. Due to Treasur's obligation to

pay a Paricipant (see § 357.13(b)). the

interest of a Parcipant and a person

suggestions. Treasur concluded that a

law. Since the results in a paricular

factual situation could depend on which new defined term, "Adverse Claim" was

needed. This definition is based on the

law is applicable, Treasur has

definition of that term in Revised

concluded that hypotheticals that

TRES until Januar 1. That should

permit suffcient tie fòr rules similar

order to avoid confusion. there was

languageïn the commentar in the

Marh 4 release that attempted to make

it clear that the term "Security

Entitlement" has a special meang in

hypotheticals to ilustrte the maner in

which selected transactions would be

treated under the TRDES regulations.

Initially, Treasur notes that Revised

B. Action With Respect to GSEs

hypotheticals explaing the operation

Several commenters noted that market of Revised Artcle 8 is unecessary. On

the other had. TRES does provide

paricipants and practitioners were

for an interaction of federal and state

concerned about coordination among

Treasur and other GSEs that issue. .

43627

a Treasur book-entr security. The

commenter noted that the term

paricular. Treasury agres that it is

§ 357.11(a)(5), the law of

the Secunties

Intermediary's jurisdiction governs on

this issue.

Procedural Requirements

This final rule does not meet the

criteria for a "significant regulatory

action" pursuant to Executive Order

12866.

"Security Entitlement" is úsed in

The notice and public comment

Revised Arcle 8 and its use in TRADES procedures requirements of the

to descrbe the interest of a Parcipant

Administrtive Procedure Act are

could be confusing. Treasury considered inapplicable, pursuant to 5 U.S.c.

using different terms to describe ~is

interest but-concluded that Security

Entitlement was the most usefuL. In

553(a)(2). . .

As no notice of proposed rulemakng

was required. the provisions of the

43628

Federal Register I Vol. 61. No. 165 I Friday, August 23, 1996 I Rules and Regulations

Regulatory Flexibilty Act (5 U.S.C. 601.

et sea.) do not apply.

There ar no collections of

information contaied in this fial rule.

Therefore, the Paperwork Reduction Act

does not apply. .

List of

Subjects in 31 CFR Part 357

Bonds. Electronic funds trsfer,

Federal Reserve System. Governent

securties, Incorporation by reference.

Securties.

For the reasons set fort in the

"TRES:' and §§ 357.42 and 357.44

and the revisions to § 357Ai ar

effective Januar 1. 1997. All other

provisions in effect prior to Januar 1.

1997, remain in effect.

3. Section 357.3 is redesignated

§ 357.2, in the defiJtion of "depository

institution" pargrphs (a) though (0

are redesignated as pargraphs (1)

thugh (6). the definition of "securty

interest and pledge" is removed, the

definitions of "Secuty" and

"TRES" are revised, and the

parership, trt,.estate. representative

and any other similar organzation but

does not mea or include the .Unit~d

States or a Federa Reserve Ban

* *

Revised Arcle 8 means Uniform

Commercial Code. Revised Arcle 8.

.Investment Securties (with ConfOrmng

and lvfisællaneous Amendments to

Arcles 1,3.4.5.9. and 10) 19901

Offcial Text Revise Artcle 8 of the

Uniform Commercial Code is

incorporated by reference in this Part

preamble. title 31. chapter II, subchapter

B, part 357 is amended as follaws:

remaining defitions arc added in

alphabetical order as follows:

puruant to 5 U.S.C. 552(a) and 1 CFR

par 51. Arcle 8 was adopted by the

PART 357-(AMENOED)

§ 357.2 Definitions.

America Law Insttute and the

1. The authonty citation for par 357

continues to read as follows: .

Authority: 31 U.S.C. chapter 31; 5 U.S.C.

301; 12 U.S.c. 391.

2. Sections 357.0 and 357.1 are added

*

*

*

Adverse Claim means a claim that a

claimant has a property interest in a

Security and that it is a violation of the

nghts of the claimant for another Person

to hold. trsfer. or deal \vith the

to read as follows:

Securty.

§ 357.0 Dual book-entry systems.

Book-entry Security means. in subpar

B of this part, a Treasury Security

(a) Treasury secunties shall be

maintaied in either of the following

two book-entr

systems:

(1) Treasury/Reserve Automated Debt

Entry System (TRADES). A Treasur

security is maintained in TRAES if it

is credited by a Federal Reserve Bank to

a Parcipant's Securities Account. See

subpar B of this part for rules

pertaining to TRADES.

(2) TREASURY DIRECT Book-entry

Securities System (TREASURY

DIRECT). A Treasury secunty is

maintained in TREASURY DIRECl if it

is credited to a TREASURY DIRECl

account as described in § 357.20. Such

* *

maintained in TRDES and, in subpar

C of this part, a Treasurf Securty

maintained in TRSURY DIRECl.

*

*

*

Entitement Holder means a Person to

whose account m interest in a Bookentry Security is credited on the records

of a Securities Intermediar.

"

Federal Reserve Bank Operating

Circular means the publication issued

by each Federal Reserve Bank that sets

fort the terms and conditions under

accounts may be accessed by investors

which the Reserve Ban maintains

Book-entr Securities accounts and

in accordance with subpar C of ths

tranfers Book-entry Securties.

par through

any Federal Reserve Bank

. or the Bureau of the Public Debt. See

subpar C of ths par for rules

pertaining to TREASURY DlRECl.

(b) A Treasur security eligible to be

maintained in TRASURY DIRECl

under the terms of its offering circular

*

National Conferenæ of Commissioners

On Uniform State Laws and approved

by the American Bar Association on

Februar 14. 1995. Copies of this

publication ar available frm the

Executive Offce of

the American Law

Institute, 4025 Chestnut Street.

Philadelphia. PA 19104, and the

National Conference of Commissioners

on Uniform State Laws. 676 North St.

Clair Stret. Suite 1700. Chcago, IL

60611. Copies are also available for

public inspection at the Deparent of

the Treasur Libra, Room 5030, Main

Treasury Building, 1500 Pennsylvania

Avenue. NW.. Washington DC 20220.

and at the Offce of

the Federal Register,

800 Nort Capitol Strt. NW., Suite

iOO. Washington DC.

Securites Intermediary means:

(1) A Person that is registered as a

"cleanng agency" under the federal

securities laws; a Federal Reserve Bank;

any other.

person that provides clearance

or settlement services with respect to a

Book-entry Securty that would require

it to register as a cleanng agency under

the federal securities laws but for an

Funds Account means a reserve and!

exclusion or exemption from the

or clearng account at a Federal Reserve 'registration requirement. if its actÍ\'Íties

Ban to which debits or crdits are

as a cleanng corporation, including

posted for tranfer agaist payment.

promulgation of rules, ar subject to

book-entr securties transaction fees, or regulation by a federal or state

pricipal and interest payments.

governental authonty; o.r

*

"

or pursuant to notice published by the

Secretar may be transferred to or from

Issue means a group of securties. as

individuaL. unless such individual is

an account in TRAES frm or to an

defined in ths section. that is identified

account in TREASURY DIRCT in

by the same CUSLP (Committee on

accordance with § 357.22(a).

Uniform Secuties Identification

Practices) nwnber.

registered as a broker or dealer under

the federal securities laws) including a

ban or broker. that in the ordinary

course of its business maintains

§ 357.1 Effective date.

Subpar B of this Part, the definitions

of "Adverse Claim," "Book-entr

Security," "Entitlement Holder,"

"Federal Reserve Bank Operating

Circular:: "Funds Account," "Issue,"

"Paricipant," "Paricipant's Securties

Account," "Person," "Revised Aricle

8," "Securties Intermediary," "Security

Entitlement," "State," and "Transfer

Message" and revisions to the

definitions of "Security" and

*

(2) A Person (other than an

secunties accounts for others and is

Participant means a Person that

maintains a Paricipant's Securities

Account with a Federal Reserve Ban.

Participant's Securities Account

means an account in the náme of a

Parcipant at a Federal Reserve Bank'to

which Book-entry Secunties held for a

Parcipant are or may be credited.

Person

means and includes an

individuaL. corporation. company.

governmental entity. association. firm,

acting in that capacity.

Secutitymeans a bil, note. or bond,

each as defined in this section. It also

means any other obligation issued by

the Departent that, by the terms of the

applicable offering circular or

anouncement, is made subject to this

par. Solely for puroses of ths part. it

also means:

(1) The interest and principal

components of a security eligible for

\

Federal Register I Vol. 61, No. 165 I Friday, August 23, 1996 I Rules and Regulations

43629

Separate Trading of Registered Interest

obligations of the United States and the

\ and Princi pal of Securties ("STRS").

I if such secunty has been divided into

interest therein from an Entitlement

Federal Reserve Bans with respetto:

Holder; and

such components as authoried by the

A Book-entr Security or Securty

Entitlement and the operation of the

ñghts of any Person, including a

Parcipant, against the United States

interest in a Secwjty Entitlement.

express terms of the offenng circular

under which the securty was issued

and the components are maitained

Treasur book-entr system: and the

separtely on the books of one or more

and the Federal Reserve Bans with

respect to: A Book-entr Securty or

Federal Reserve Bans; and

(2) The interest coupons that have

(5) Except as otherwse provided in

pargraph (c) of this secton, the

perfection, effect of perfection or non­

perfecton and pnonty of a security

Securty Entitlement and the operation

(b) The following rules determine a

"Secunties Intermediar's junsdiction"

for puioses of ths section:

ben converted to book-entr form

under the Treasur's Coupons Under

governed solely by Treasur regulations,

Book-Entr Safekeeping Program

including the reulations of ths Part,

("CUBES"), pursuant to agreement and

the regulations in 31 CFR par 358.

Security Entitlement means the nghts

the applicable offenng circular (which

Secuties Intermediar and its

Entitlement Holder specifies that it is

governed by the law of a parcular

is 31 CFR par 356, in the case of

junsdiction. that jursdiction is the

secuties issued on and after Marh 1,

Secunties Intermediary's jursdiction.

and property interest of an Entilement

Holder with respect to a Book-entr

Security. .

*

*

*

*

State means any State of the United

States, the Distrct of Columbia, Puerto

Rico, the Virgin Islands, or any other

territory or possession of the United

States.

*

of the Treasur book-entr system; ar

the offenng,

1993), the anouncement of

and Federal Reserve Ban Operating

Circulars.

. (b) A securty interest in a Security .

Entitlement that is in favor of Federal

Reserve Ban from a Parcipant and

that is not recorded on

the books of a

Federal Reserve San pursuant to

§ 357.12(c)(1), is governed by the law

(not including the conflict-of-Iaw rules)

(1) If an agreement between the

(2) If an agreement between the

Secunties Intermediar and its

Entitlement Holder does not specify the

governng law as provided in paragraph

(b)(1) of this section. but expressly

specifies that the secuties account is

maintained at an offce in a paricular

junsdiction, that jursdiction is the

Securties Intermediary's jurisdiction.

(3) If an agreement between the

of the jursdiction where the head offce Securities Intermediary and its

of the Federal Reserve Bankmaintaining Entitlement Holder dcies not specify a

Automated Debt Entr System, also

jurisdiction as provided in paragraph

referred to as the commercial book-entry the Paricipant's Securties Account is

located. A security interest in a Security (b)(1) or (b)(2) of this section, the

system.

*

*

*

Entitlement that is in favor of a Federal Secunties Intermediary's junsdiction is

the jurisdiction in which is located the '

Reserve Ban from a Person that is not

, Transfer Message means an

offce identified in an account statement

a Parcipant, and that is not recorded

as the offce serving the Entitlement

) instrction of a Paricipant to a Federal

on the books of a Federal Reserve Bank

. Reserve Bank to effect a trnsfer of a

Holder's account.

TRADES is the Treasury/Reserve

puruant to § 357.12(c)(1), is governed

Book-entry Security maintained in

TRADES, as set fort in Federal Reserve

Bank Operating Circulars.

by the law determined in the manner

4. Subpart B, consisting of §§ 357.10

(c) If the jursdiction specified in the

first sentence of paragraph (b) of this

section is a State that has not

adopted

Revised Article 8 (incorporated by

though 357.14. is added to read as

follows:

Subpart B- Treasury/Reserve

Automated Debt Entr System

(TRADES)

specified in § 357.11.

reference, see§ 357.2) then the law

specified in pargrph (b) of this section

shall be the law of that State as though

Revised Arcle 8 had been adopted by

that State.

§ 357.10 Law governi'ng rights and

obligations or United States and Federal

Reserve Bank: rights or any Person

against United States and Federal

Reserve Banks.

§ 357.11 Law governing other interests.

§ 357.12 Creation or "Paricipant's Secuity

Entitlement: ,security interests.

§ 357.13 Obligations or United States; no

Adverse Claims.

§ 357.14 Authority or Federal Reserve

Banks.

Subpart B- Treasury/Reserve

Automated Debt Entr System

§ 357.11 Law governing other Interests.

(2) The nghts and duties of the

Securties Intermediar and Entitlement

Holder ansing out of a Secunty

Entitlement;

(3) Whether the Securties

Intermediary owes any duties to an

§357.10 Lawgovemingrightsand

adverse cl;iimant to a Security

obligations of United States and Federal

Reserve Banks; rights of any Person

Entilement;

,i .against United States ai:d Federal Reserve

(4) Whether an Adverse Claim ca be

asserted against a Perso.n who acquires

a Security Entitlement from the

(a) Except as provided in paragraph

(b) of this section. the rights and

Entitlement Holder does not specify a

jurisdiction as provided in paragraph

(b)(l) or (b)(2) of this section and .an

account statement does not identify an

offce serving the Entitlement Holder's

account as provided in paragraph (b)(3)

of this section, the Securties

Intermediar's junsdiction is the

junsdiction in which is located the chief

executive offce of the Securities

Intermediary .

(c) Notwithstanding the general rule

in paragraph (a)(5) of this section, the

(a) To the extent not inconsistent with

these regulations, the law (not including law (but not the conflct-of-Iaw rules) of

the conflct-of-Iaw rules) of a Securties the jurisdiction in which the Person

Intermediar's jursdiction governs:

creating a security interest is located

(1) The acquisition of a Secunty

governs whether and how the secuty

Entitlement from the Secunties

interest may be perfected automatically

Intermediar;

or by fiing a financing statement.

(TRADES)

i Banks.

(4) If an agreement between the

Securities Intermedíary and its

Securities Intermediar or a Person who

purchases a Security Entitlement or

(d) If the junsdiction specified in

paragraph (b) of this section is a State

that has not adopted Revised Artcle 8

(incorporated by reference, see § 357.2),

then the law for the matters specified in

paragraph (a) of this section shall be the

law of that State as. though Revised

Article 8 had been adopted by that

State. For puroses of the application of

the matters specified in paragraph (a) of

this section, the Federal Reserve Bank

maintaining the Secunties Account is a

clearing corporation, and the

43630

Federal Register I Vol. 61, No. 165 I Friday, August 23, 1996 I Rules and Regulations

Parcipant's interest in a Book-entr

Secunty is a Securty Entitlement.

securty interest in favor of a Federal

Reserve Ban. may be perfected by any

Account at the Ban or othen..ise

§357.12 Creation of Participant's Security

directed by the Parcipant. No action bv

Entitlement; seurity Interets.

method by which a secty interest

may be perfected u~der applicable law

(a) A Parcipant's Secty

Entitlement is created when a Federal

as descrbed in § 357.10(b) or § 357.11.

The perfecton. effect of perfection or

with the redemption of a Book-entr n

Reserve Ban indicates by book entr

non-perfection and prionty of a secunty

that a Book-entr Secity has been

interest ar governed by that applicable

credited to a Parcipant's Secunties

law. A securty interest in favor of a

Account.

Federal Reserve Ban shal be trated as

a secuty interest in favor of a cleag

corporation in all respec under that

Entitlement of a Parcipant in favor of

law, including with respect to the effect

the United States to secur deposits of

of perfection and prionty of the security

public mpney; includig without

interest. A Federal Reserve Ban

limitation deposits to the Treasur tax

Operating Cirular shall be trated as a

and loan accounts, or other securty

interest in favor of

the United States that rule adopted by a clearg corporation

for such puroses.

is required by Federal statute,

(b) A secunty interest in a Securty

regulation. or agreement, and that is

marked on the books of a Federal

Reserve Bank is thereby effected and

perfècted, and has priority over any

other interest in the securities. Where a

security interest in favor of the United

States in a Secunty Entitlement of a

Paricipant is marked on the books of a

Federal" Reserve Bank. such Reserve

Ban may rely, and is protected in

relying, exclusively on the order of an

authorized representative of

the United

States directing the transfer of the

secunty. For puroses of ths paragraph,

, an "authorized representative of the

) United States" is the official designated

. in the applicable regulations or

agreement to which a Federal Reserve

Ban is a party. governing the security

interest.

(cl (1) The United States and the

Federal Reserve Banks have no

obligation to agree to act on behalf of

any Person or to recognize the interest

of any transferee of a security interest or

other limited interest in-favor òf any

Person except to the extent of any

specific requirement of Federal

law or

regulation or to the extent set fort in

any specific agreement with the Federal

Reserve Ban on whose books the

interest of the Parcipant is recorded.

To the extent required by such law or

regulation or set fort in an agreement

with a Federal Reserve Bank, or the

Federal Reserve Ban Operatig

Circular, a securty interest in a Secunty

Entitlement that is in favor of a Federal

Reserve Bank or a Person may be

. created and perfected by a Federal

ReserVe Bank markig its books to

record the secmity interest. Except as

provided in paragraph (b) of

this

section. a security interest in a Security

Entitlement marked on the 'books of a

\ Federal Reserve Ban shall have priority

lover any other interest in the secu.-ities.

. (2) In addition to the method

provided in paragraph (c)(i) of this

section, a security interest. including a

§ 357.13 Obligations of the United States;

no Advers Claims.

(a) Except in the case of a secunty

interest in favor of the United States or

a Federal Reserve Ban or otherwise as

provided in § 357.12(c)(i). for the

purposes of this subpar B. the United

States and the Federal Reserve Bans

shall treat the Parcipant to whose

Securties Account an interest in a

Book-entr Security has been credited

as the person exclusively entiled to

issue a Transfer Message, to receive

interest and other payments with

respect thereof and othenvise to

exercise all the rights and powers with

respect to the Secunty, notwithstanding

any information or notice to the

contrary. Neither the Federal Reserve

Ban nor Treasury is liable to a Person

assertng or having an Adverse Claim to

a Securty Entitlement or to a Book­

entr Security in a Parcipant's

Secunties Account, including any such

claim arising as a result of the transfer

or disposition of a Book-entr Secuty

by a Federal Reserve Ban pursuant to

a Transfer Message that the Federal

Reserve Ban reasonåbly believes to be

genuine. .

(b) The obligation of

the United States

to make payments of interest and

pricipal with respect to Book-entry

Secrities is dischared at the time

payment in the appropriate amount is

made as follows: .

(1) Interest on Book-entr Securties is

either credited by a Federal Reserve

Ban to a Funds Account maintained at

the Ban or otherwse paid as directed

by the Paricipant.

(2) Book-entr Securities are

redeemed in

"accordance witl their

terms by a Federal Reserve Bank

withdra\ving the securities from the

Paricipant's Securities Account in

which they are maintained and by either

crediting the amount of the redemption

proceeds. including both principal and

interest, where applicable. to a Funds

paying such principal and interest as

the Paricipant i!l required in COlUectio­

Secunty.

§357.14 Authority of Federal Resrve

Banks.

(a) Each Federal Reserve Ban is

hereby authorized as fiscl agent of the

United States to perform fuctions With

respect to the issuance of Book-entr

Secunties offered and sold by the

Deparent to which ths Subpar

applies, in accordance with the terms. of

the applicable offerig circular and with

procedures established by the

Deparent; to service and maintain

Book-entr Securities in accounts

established for such puroses; to make

payments of pnncipal and interest. as

directed by the Deparent; to effect

transfer of Book-entr Securities

between ParcipantS' Securities

Accounts as directed by the

Paricipants; and to perform such other

duties as fiscal agent as may be

requested by the Deparent.

(b) Each Federal Reserve Bank may

issue Operating Circulars not

inconsistent with this Part, governing

the details of its handling of Book-entr

Securities; Secunty Entitlements. and

the operation of the book-entr system

under this Part.

5. In subpart D. § 357.41 is revised

and the text of §§ 357.42 and 357.-4 are

added. to read as follows:

Subpart D-Additlonal Provisions

§ 357.41 Waiver of regulations.

. The Secretary reserves the nght. in

the Secretary's discretion. to waive any

provision(s) of these reulations in any

case or class of cases for the

convenience of the United States or in

order to relieve any person(s) of

unnecessar hardship. if such action is

not inconsistent with law. does not

adversely affect any substantial existig

rights. and the Secretary is satisfied that

such action wil not subject the United

States to any substantial expense or

liability.

§ 357.42 Liabilty of Department and

Federal Reserve Banks.

The Deparent and the Federal

Reserve Banks may rely on the

information provided in a tender.

transaction request form. or Trasfer

Message, and are not required to verify

the information. The Deparent and

the Federal Reserve Banks shall not be

liable for any action taken in accordance

with the information set out in a tender.

transaction request form, or Transfer

Federal Register I Vol. 61. No. 165 I Friday. August 23. 1996 I Rules and Regulations

Message. or evidence submitted in

support thereof.

§ 357.44 Notice of atchment for

seurities In TRADES.

The interest of a debtor in a Secuity

Entitlement may be reached by a

creditor only by legal process upon the

Securties Intermediar with whom the

debtor's securties account is

maitaied. except where a Securty .

Entitlement is maitained in the name

of a secured pary. in which cae the

debtor's interest may be reached by legal

process upon the secured pary. These

regulations do not purport to establish

whether a Federal Reserve Ban is

required to honor an order or other

notice of attaclient in any parcular

case or class of cases.

6. Appendix B to part 357 is added to

read as follows:

Appendix B to Part 357-TRAES

Commentary

Introduction

The adoption of regulations for the

Treasury/Reserve Automated Debt Entry

System ("TRDES") is the culmination of a

multi-yea: Treasury process of moving from

issuing securities only in definitive

(physical/certifcated/paper) form to issuing

securities exclusively in bok-entr form.

The TRADES regulations provide the legal

!'ework for all commercially-maintained

Treasury bok-entr secuties. For a more

detailed explaation of the proetural and

legal development of book-entr and the

TRDES reglations, see the preamble to the

rule proposed Marh 4. 1996 (61 FR 8420).

as well as the earlier proposals cited therein

51 FR 8846 (March 14, 1986); 51 FR 43027

(November 28. 1986); 57 FR 12244 (April 9.

1992).

Comparison of TRAES, and Treasury Direct

A person may hold interests in Treasury.

book-entr securities either in TRADES i or

TREASURY DlRECl. The following

summarizes the major differences between

the two systems.

Persons holding Treasury bok-entr

secirities in TRDES hold their interets in

such securities in a tiered sytem of

ownership accounts. In TRDES, Treasur.

through its fiscal agents, the Federal Reserve

Banks. recogizes tho! identity only of

Paricipants (persons with a diret account

relationship with a Federal Reserve Bank).

While Participants may be beneficial owners

of interests in Treasury book-entrsecuities.

there are many beneficial owners of such

beneficial owners hold their interests thugh

one or more Secties Intermediares such as

banks. brokerage firs or secuties clearng

organizations.

In TRES, the rights of non-Paricipant

beneficial owners may be exercised only

through their Secities Intermediares.

Neither Treasur nor the Federal Reserve

Banks have any obligation to a nonParticipant beneficial owner of an interest in

a Treasur book-entr securty. Two

exaples ilustrte this principle. First,

except where a pledge has ben reorded

Bank puruant"o § 357.12(c)(1), Federal

Reserve Banks. as Treasur's fiscal agents,

wil act only on instrctions of the

Paricipant in whose Secties Account the

Treasur bok-enir security is maintained in

recording trfers or an interet in a

Treasur book-entr secuity. A beneficial

owner of the interest that is a non-Paricipant

Treasur bok-entr secuity. Moreover, the

reulations deal with certin aspets of

trsactions in Treasur securties. such as

perfection of a sety interest and its effects

and not other aspects. such as the contractual

relationship between a debtor and its securd

pary. which ar left to applicable law 3 See

the discussion under § 357.10 of the Sectionby-Section Analysis.

Section-by.

Section Analysis

Section 357.0 Dual Book-entry Systems

Section 357.0 sets fort that Treasur

provides two systems for matntaining

Treasur book-entr securitiesTRES and TRASURY DIRECl.

Subpart A of

par 357 of 31 CFR

has no abilty to direct a trfer on the books contains general information about

of a Federal Reserve Bank Second. Treasury

. dischares its payment obligation with

respect to a Treasur book-entry security

when payment is crdited to a Paricipant's

account or paid in accordance with the

Participant's instrctions. Naither Treasur

nor a Federal Reserve Bank has any payment

obligation to a non-Participant beneficial

owner of an interest in a Treasury book-entr

security. A non-Parcipant beneficial owner

receives its payment when its Securities

Intennediary crdits the owner's account.

Persons holding Treasury book-entr

securites in TRESURY DlRECl, on the

other hand, hold their secities accounts on

records maintained by Treasury thugh its

fiscal agents, the Federal Reserve Banks. The

primar charcteristic of

TRSURY D1RECl

is a dirt account relationship between the

beneficial owner of a Treasury book-entry

security and Treasur. In TREASURY

D1RECl, Treasury dischares its payment

obligation when payment is crdited to the

depository institution specified by the

beneficial owner of the Treasury book-entr

security. paid dirctly to the beneficial owner

by check, or paid in accordance with the

beneficial owner's instrctions. Unlike

TRDES. TRESURY DIRECl does not

TRES and TRSURY DIRCl.

Subpar 8 contains the TRES

regulations. Subpar C contains the

TRSURY DIRCl regulations.

Subpar D contains miscellaneous

provisions. Thus. in its totality. Part 357

sets fort in ane place the complete set

of governing rules for Treasur

securties issued in book-entry form.

Secion 357.1 Effecive Date

Section 357.1 establishes the effective date

for TRDES. TRDES applies to outstanding

securities fonnerly governed by 31 CFR par

306, subpart O. Conforming changes to paIs

306. 356, and 358 are being made to coincide

TRADES in final

fonn. Consistent with the approach set forth

in Revised Aricle 8 (see § 8-03 and the

offcial comment thereto). on and after the

effective date these regulations wil apply to

all trnsactions, including trnsactions

commenced prior to the effective date.

with the publication of

Revised AricleS, in Section 8-03. gave

secured paries four months after the

effective date to take action to continue the

perfection of their security interests.

provide a mechanis for the exchange of

TRADES. through its delayed effectiveness.

provides a similar period. In TRADES.

cash to settle a secondaf' market trnsaction,

January 1, 1997, becomes the Qate by which

nor ar pledges of

Treasury bok-entr

securities held in TRASURY DIRCl

generally recognized. Accordingly.

TRASURY DIRCl is suited for persons

,who plan to hold their Treasury securities

until maturity. and provides an alternative

for investors who ar concerned about

holding securities though intennediaries

such actions must be completed.

The effective date for TRDES is January

1.1997. While TRAES is based in lare part

on Revised Aricle 8 that has receh'ed

widespread attention in the financial

community and already has been adopted in

'T.he regulations in 31 CF 306.118(b1. which are

and who do not wish to hold their interests

being supplanted by TRES. state that "applicable

in Treasury securities indirectly in TRADES.

la w" cm.ers how a transfer or pledge is "effected"

as well as perfected. Except with respec to security

interests marked on the books of a Federal Reserve

Bank. TRDES does not address how a security

interest in a Treasury book-.ntr security is creted

or what law governs the creation of a security

interest. Section 357.11(a) ofTRDES. which

Scope of Regulation

i In TRDES a Persn's interest in a Treasury

book-entr security is a Security Entitlement. as

described in TRDES. A Participat's interet in a

marketable Treasury book-entr seurity also is a

Security Entitlement. A Paricipæit's Security

Entitlement is different than a Seity Entitlement

Just as the scope of Revised Aricle 8 is

limited.2 the scope of this regulation is

limited. It is not a comprehen~ive

codification of the law governing securities.

trnsactions in securities or the law of

Participant's Security Entitlement is described in

Revised Aricle 8.

interest in a TreasUr bok-entr security.

For example, state laws regarding divorce or

intestate Succession could well affect which

persons have eights in the interest in a

diretly on the boks of a Federal Reserve

interests that are not Participants. Such

) as described in Revised Aricle 8. with respect to

/ the Pa.-iicipant's rights against the isuer. A non.

43631

contrcts for the purchase or sale of

sp.curities. Similarly. it is not a codification

of all laws that could affect a person's

establishes the choice of law for interets other than

those covered by § 357.10. addrsses the choice or

law with respect to the perfection. effect of

perfection or non-perfection. and priority of

security interests. but does not address the law

governing creation or aiiachment of a security

2 U.C.C. Revised Aricle 8. Prefatory Note at 12.

interest. This is consistent with iJe scope and

choice of law provisions of Revised Aricle 8.

43632

Federal Reger I Vol. 61, No. 165 I Friday. August 23, 1996 I Rules and Regulations

28 states,4 Treasur has determned that

. TRDES wil be effective on Januar 1. 1997.

to ensure a smooth transition to TRDES. In

)nakng that determination, Treasur has

taken into account the time reuird by other

Government-Sponsored Enterprises (GSEs) to

promulgate similar reglations for their

securities. Such an effective date. when

(d) Security Entitlement

A Secty E.titlement is the interest that

an Entitlement Holder has in a Treasurv

bok-entr security. In U!e example. Paricipant. Broker-Dealer and individual

Holder all hold Security Entitlemenis. The

rights and property interests associated with

combined with TRAES having ben

a Security Entitlement of a Paricipant held

published in proposed form with a 50-day

on the boks of a Federal Reserve Bank

comment period, should provide suffcient

time ror an orderly trsition to the new

(~'Paricipant's Security Entitlement") are,

howe\'er. different from the rights and

TRDES rules. .

propert interests assoiated with other

Section 357.2 DefiniUons

Section 357.2 contains definitions for use

in subpars Band C. While most or the .

definitions ar slraightforward. four termsParicipant, Entitlement Holder. Securty

Entitlement and Securities Intermediar-a

critical to an unde:-tanding of the proposed

TRADES regulations.

(a) Participant

A Paricipant is a person that has a

seciritie~ account rclationshio in its name

with a Feder.l Reserve Bank. Accordingly.

the :ederal Reserve Bank and Treasury know

both the identity of the persons maintaining

these accounts and the.

Treasury book-entry

Secrity Entitlements. As provided in .

§ 357.10(a). Federal law defines the scope

and nature of a Participant's Security

Entitlement. While TRADES is basd in large

part on Revised Aricle e, the meaning or

Security Entitlement under federal law is

differe~t than under Revised Aricle 8. For

example. Paric:pants have a direct claim

against the United States ror interet and

principal even though, under state iaw. an

Entitlement Holder would only have a claim

against its Securities In!.errediaiy for such

payment. To the extent not inconsistent with

this reulation. the scope and natur of a

Security Eniitlement of an Entitlement

Holder below the level of a Particiodnt.

securities held in these accounts.

(Broker-dea!er and Individual Holder in the

(h) Securities Intermediary

Securities Intermediaries are persons (other exaple abo\'e), is defined by applicable

state law. as deterrined pursuant to § 357.11.

than individuals, except as described below)

It should also be noted that ....hile a

th:it are in the business of holding interests

Parcipant's :ights have Federal

in Treasury book-entt securiti.es for others.

law

Paricipants can be. and usually are,

components under § 357.10(a), the nature of

S.iurities Intermediaries.

.. In addition, entities such as dearing

\orpo:ations, banks. brokers and dealers can

be Securities Intermediaries in a single chain

of ownership of a Treasury security. An

individual, unless registered as .! broker or

a Security Entitl::ment held by a lowo;r tie:'

intermediary 0:\ tl:e books of a Paricipant is

determined pursuant to a;iplicable law as

provided iii § 357.11.

offered pursuant to a unifomi orfering

circular set fort at 31 CF pan 356.

While TRADES is based in lare mo;asure

on Revised Aricle 8. a fudamental prinCiple

of these reulations (and a divergence frm

Revised Aricle 8) is that the obligations of

the issuer (the United States) and the Federal

Reserve Banks, as well as all claims with

respilct to TRADES or a Treasury bok-en!r

. security against Trtlasur or a Federal

Reserve Bank. are governe.d solely by Federal

law. Thus. for exaple. those pars of

Revised Arcle 8 that detail obligations of

issuers (or their agents) of secties ar not

applicable to either the United States or

Federal Reserve Banks.7 In addition. neither

the United States nor Federal Reserve Banks

have any obligations to persons holding their

interests in a Treasury bok-entr secity at

levels below tle level or a Paricipant or tò

any other person claiming an interest in a

Treasur book-entr security (with the

limited exception set out in § 357.12(c)(i)).

Thus. there are no derivative rights agai!!st

either the United States or the Federal

Reserve Banks.

(n interpreting this section. it is important

to note that the scope of

TRADES. like that

of Re\'i:;ed Article 8. is limited. Accordingly.

the goveruii:g law set forth in § 357.10(:1) is

applicable only to the maU,,!' set forth in

§ 357.10(a). Gther laws remain applicaiile

and could affect the holders of beak-entry

securities.

For example, the tax treatment of

So;curities Entitlements is outside the scope

TRADES and other law (the Fedtlra!

income tax code) is appliCable in

of

determining such tax treatment. Similariy.

nothing in § 357.10(a) limits the applicability

Section 35ì.10 LaI\'Co~'erning the United

of orher iaw~ to matt.~rs such as whether ~hi!

dealer under thp. federal securities laws.

cannot be a Securitie~ Intermedia.ry. As an

Slates and Resen¡e Ba:iks

ilustrtion of a possible chain of ownership,

in the following chart. U¡e Federai Reserve

and obligations of the United States and tle

activities of Participants or Securities

Intermediaries with respect to interests in

Treasury book-entry securities are subject to

Bank, Participant and Broker-Dealer are all

Securities intermediaries.

Treasury

Federnl Reservp. Bank

I

Participant

I

Broker-Dealer

I

Individual Holder

. (c) E:itit/ement Holder _

An Entitlemtlnt Holder is an)' person for

whom a SecuCitics .Iniermediar holds a:\

Section 357.10(a) provides that :he rights

F'edernl Reserve Banks (wirh one exception

detailed below). with respect to both the

TRADES system and Treasury book-entr

securities maintained in TRADES are

governed solely and exclusively by Federal

law. Thus. daims against the ü¡¡ited States

and Fede!'.!1 Reserve Banks of both

and all oiler per30ns with an

interest (or claiming an interest! in a

Treasury book-entry security maintained in

TRDES l're govenied by Federal law.

Paricipants

Federal

law is defir,ed to include TRADES.

the.ofti!ring circulars pursuant to which the

Treasur securities arc sold. thp. offering

announcements and Federal Reserve Bank

interest in a Treasur book-entry security. in

Operating Circulars.s Prior to March I, 1993.

the above exampla Individuai Holder.

the terms of each offering d Treasur

securities, except for Treasur bils were set

forth in an offering circular published in the

Federal Regster.6 Since March 1. 1993. all

Treasu.ry book-entry securities have been

Broker-Dealer and Paricipant are all .

Entitlement Holders. ïhu:i, a person can be

both a Securities !ntermediarv and an

. Entitlement Hòlder. See also the commentary

on "Sc:curity Entitlement."

, A "Feceral Reserve Bank Ope:~tin6 Circular" ;5

ddi:ied in § 357.2 as the Dubli12tien lssued by each

. .... of ..ugust1. 19!16. ihasa stat~.; ar", ..Iabama.

Alaska. Arizona. Arkansas. Colorado. Idaho.

ll1inois. !:diana. !owa. Kansas. Ke::ti:ckv.

)o.ui~ia~a. .Ma,ryland.

/o!in:,,,se:a.

,1'SSISS:Ppl.

:-ebrasb.~fassachus~::s.

New Mexico. O.:!anoma.

Òregon. P~nnsylvania. Texas. Utah. Vermont.

Virginia. Washington. West Virgin;a and Wyoming.

S~e disc:.ssion accompanying rlJot~ote 11.

Federal Re,,,rve Bank thåt sers forth the terms and

conditions under which the Reserve Bank

banking or s.,curities laws.

While TRADES in § 357.10(a) define. what

iaw gov'irns the contract between the Lniteò

States, as issuer. and the holder of a Seccrity

Entitlement. it is not a complete statement of

the contract law applicable to the United

States or Federal Reservo; Banks. For

example. if a Participant obt.ains a discount

window loan from a Federal Reserve Bank

and agrees to pledge collateral. including

íreasuiy book-entr securities. to thtl Federal

Reserve Bank as security for the loan.

§ 357.10(a) does not establish thtl law :o~

determining the valiåity or e:iforceabHi:y of

the contract or the iaw applicable to the

creation and perfection of security inte:ests

in property that is nota Treasuiy book-e::ir

sec:rity. Section 357.10(a) docs pro,'ide the

law applicable for how a security interest in

Trtlasury book-entr secur:ties is perfe:::.,d.

rhe priority of such interest and, if

§ 35ï.1:!(c)(1) is applicable. bow such

security interest is created. Similarly. noÜiing

in § 357.10(a) affects the continuing

applicability or enforceability of Federal

Reserve BanI: operating circulars sucI as the

circular :;etting forth provisions regar¿ing

maintains ilook-intry S"curiti~s ..\ccot;nts aiid

t.ansfers Bouk-eni:y Securities.

6ireasu.y bilis were issued pursuant to one

master offering drcular (31 CFX part 349. rerrw"ecf.

and ..placed by 31 CFR par 356) effective March

1.1993. (58 FR 412)

'The regulations in tubpart C of this p.n se~ out

other obligat:ons of the United States and t::~

Feeleral Reserve Banks for secur::i~s held i"

TREASURY DIRECT. The,e regulitions pr~e::?t

~!,pl;G1ble ,rat_: I.w.

Federal Register I Vol. 61. No. 165 I Frida)'. August 23. 199(ì i Ruies and Regulations

43633

electronlc access to service~ provided by

F.ederal R?serve Banks and agreements

executed in connection with 'Such circulars.

The law applicable with re~O¡;.:i tv

interests granted to a Federal Reserve Bank

depends on the mai:er in which the sec-irity

interest is grn~ed.

Where a security interest in favor of a

For purpose3 oi applying the state law

chosen under the rules of § 357.10(b). FedE:ral

Reserve

Banks ar trated as clew inti

r:rporations. As a reult. a security int..rnst

in a Se-..;i:ies Entitlement of a P".iiC:l'anl in

favor oi a Fiideral Reserve Bank under

§ 357.12(c)(2) has the sanie priority as

security interests gran:ed to other clearing

federal Reserve Bank is marked on the boks

corporations under state law. This is.

of the Federal Reserve Bank under Section

consistent with the tr;itment ãccorded to

357.12(c)(1). § 357.10(a) establishes the

applicable law. A security interest in favor of

Federal Reserve Banks generally under

Revised Aricle 8.

a Federal Reserve Bank would be rerded on

the Federal Reserve Bank's books where. for

example. the Federal Reserve Bank made a

discount window loan to a depository

institution and any Treasur bok-entr

. securities provided by the depository

institution as collateral have been deposited

to a pledge account on the books of the

Federal Reserve Bank; For a borrowing

depository institution that is not a

Paricipant. the book-entr securities used as

collateral generally would be deposited to the

Federal Reserve Bank pledge account by the

borrowing institution's Securities

Intermediar. See Hypothetical 5.

Secion 357.11 Law Governing Other

Interests

Revised Aricl.. 6 if the choice of law ;mal vsis

required by § :i57.11(bI1"suli~ in the chviee

o~ ihe ~~w cf a Slat'3 that has not yet adop:eè

R~vised ¡\rticle s. .~..s r~:~f' C'l:~.:¡:...~~. ~~

such a situation. the Stale's law is v;"wed as

if it had adopted Revised .-\icle 8. This

section also provides that. ior purp~es of

applying state law, the Federal Reserve Banks

are dearing corporations and Participants'

interests in bok-entr securities 3!ii Security

Entitlements.

(b) Limited SCOM of Federal Prmption

In an earlier TRDES proposal Treasur

contemplated adopting a comprehensÌ\'e

(a) La;v Governing the Rights and Ohligation

regulation go\'erning the rights of all persons

substantive matters subject to this choice or

TRDES. Such an approch was proposed

because Treasur belie\'ed that a uniíorm

rule was necessary to preserve the effciency

of Participants and Third Parties

Section 357.11 is a choice oflaw rule. The

law rule are set forth in § 357.11(a). The

matters set fort in § 357.11(a) are meant to

be coextensive with those matters covered by

Revised Aricle 8 with respect to a person's

interest in a Treasur bok-entr security

(other than those related to a person's

relationship to Treasur or a Federal Reserve

Bank which are governed solely by federal

law). For purposes of these choice of law

in Treasury bok-entr secuties held in

and liquidity of the market for Treasury

securities-the most liquid and effcient

market in the world. Treasur believed then.

and believes now, that the måterial rights of

a holder in the United States of an interest

in a Treasur security should not \'ary soleiy

by virtue of such holder's geogphic location

Section 357.10(b) sets forth law applicable

..ith respect to security interests in favor of

a Federal Reserve Bank that have not

been

marked on the books of a Federal Reserve

rules Participants are Secuities

In termediares.

Bank. A security interest in the Securties

Entitlement of a Participant in favor of a

8's general choice of law rule. Section

Federal Reserve Bank that is not marked on

tne books of the Federal Reserve Bank is

governed by the law of the state in which the

rule with respect to security interests

perfected automatically or by filing. which

also is included in Revised .-\¡cle 8.

developing an independent system of Federal

law.' The questions inherent in

a tiered system of ownership have been

analyzed. and. in Treasur's view.

head offce of the Federal Reserve Bank is

Generally. the law applicable to the

satisfactorily addressed by Revised A."ticle 8.

located. Such a security interest"could arise.

Section 357.11(b) adopts Revised Aricle

357.1l(c) sets fort a special choice of law

Securities Intermediar wiI govern matters

for example. where the delivery oibok-entr involving an interest in a book-entr security

securities to the securities account of the

Paricipant r'!sults in an o\.erdraft in the

Paricipant's Funds Account. The extent to

which the Federal Reserve B;ink has an

intp.rest in the Participant's book-entry

securities to secure the overdraft therefore

would be determined under the law of the

state in which the Reserve Bank's head offce

is located. If the State in ".:hich the head

offce of the Federal Reserve Bank is located

has not adopted Revised .\rticle 8. under

§ 357.10(c) that Státe is deemed to have

adopted Revised Aricle 8.

In certain very limited cirstances. a

Federal Reserve Bank also may have a

security interest in the book-entr secuties

of a non.Paricipant that is not marked on the

books of the Federal Reserve Bank.. Section

357.10(b) provides a separte rule for such a

security interest.. which would be go\'crned

bi" the law of the non-Participant's Securities

Interrediar. as determined under § 357.11.

Under § 357.11, the perfection. effect of

perfection. and priority of a security interest

created under su::h an agreement would be

l!oVtrned bv the law of the Securities

rntemiediary's jurisdiction, as dctl!rmined

under§357.11(b). Under§357.11(dl, if

the

jurisdiction specified in § 35i.11(b) has not

adopted Re\'ised Article 8. juri~diction would

be deemed to h;ive adopted Revised Aricle

e.~

IS.-\ in!e::~st in book-en:r;o secur;:i~s oI a non4

Pa,,¡cipan: that is nut maÙed on the boo\; of thl!

federal Reserve Bank. while u:icommon. could

arise where th" federal Reser,.e Bank lends to a

held through that intermediary. This

approach is not followed with respect to

perfection of security interests automatically

or by filing. (n those cases, the law 0; the

jurisdiction in which the debtor is located is

the governing law. Since fiing systems are

based on the location of the debtor. this

approach should reduce uncertainty and

preserve the normal practice of searching

records based on the debtor's location.9 The

or the location of the financial institution

through which it holds its interest ic

Treasury securities. In light of Revised

Article 8. Treasury has determined that it is

possible to achieve this uniformity ..ithout

commercial

As of August 1. 199G. 28 states have

adopted Revised Aricle 8 and Treasurv

understands that it wil soon be adopted in

additional states. As with all uniform laws,

the adoption proess takes se\'eral years. In

order to assure uniformity. in light of the

unavoidable delays in the s~ate-by-state

adoption proc~ss of Revised Article 8.

Treasur is promulgating regulations with a

limited form of

preemption. As pro\'ided in

both §§ 357.10(c) and 357.11(d), if

the choice

of law rules set forth in TRDES would lead

language "person crating a security interest" to the applkation of the law of a State that

is used in lieu of the term "debtor" in this

has not yet adopted Revised Article 8.

pro"'ision to avoid any confusion. The word

TRADES wil apply Revised Aricle 8 (with

"debtor" has two meanings in the Uniform

conforming and miscellaneous amendments

Commercial Code and the expression

to other Articles) in the form approved bv the

"person crating a security interest" provides ALl and NCCUSL. Treasury expects that'

clarty with i"spect to who is covered by this

these provisions wil be operative on

section. The term does not refer to a creditor.

during the state-by-state adoption process

The language "is located" is intended to

conform to its meaning under applicable law.

as it may be amended from time to time. See

e.g., U.C.C. section 9-103(3)(d). Section .

357.11(d) provides for the application oi

and would plan to amend TRADES to delete

i)'

refe;ence to these provisions once the

adoption process has been completed.

While Revised Article 8 is defined to mean

the offcial text of Article 8 as appro\'e¿ by

the All and NCCUSL. Treasury recošnizes

:ien.Paricipant deposito:ry ir.stitution and enters

into a triparty agreement witl the depository

that states may make minor changes i:i that

ir.stitution and :ts Secu:i~ics !ïitcnnediarv r.:tlier

concluded that minor changes should not

prevent Revised Article 8, .as adopteè bi" a

state. from being the appropriate law. In

other words, if a state passes a version or

Article 8 that is substantially identical to

than requiring the deposit of the book-eniry .

s"curiti~. in a pledge account o:i the bo"k, of the

Federal Reserve Bank through an Í¡struc:ion give"

oy the non-Participant depository in.titution to its

S~curities Intermediary.

"The substantive efiect of fiing is !iinit.,d a:id

applies only in slates which have adopt~d Revised

..iticla 6. Since tho eirect of in;;

Iii is a ;.nique state

law matter. in this one area. Treasury has

determined that possible lack or uniiormi:y does

not justify altering .tate law.

¡p.xt when ado;iting Article 8_ Treasury has

Re'/isi.d Article 8. refe:-nce to Revised

Article 8 (as defined) would no longer be

:cquired. Treasury has determined that the

. Ai noted pre,.busly. the substantive SCO¡;~ or

this regulation is limited.

43634

Federal Regier I Vol. 61. No. 165 I Friday. August 23, 1996 I Ruies and Regulations

\'ersions of Article 8 passed by 28 states to

:liat ha\'e enacted Aricle 8 as of the date this

rule is published in the Feder"l R~ist'!r

meet this stind3Id, According!y, §§ 35/, lO(c;

..nd 35 i .11(d) would not n. applicab!tl if the

choice of law provisio:is of TRAES dirted

a per~on to one of those states. As additional

states adopt Revised Article 8. Treasury wil

provide notice in the Federal Register as to

whether :he enactments are "substantially

identical"' to thp. uniform version for

puroses of these regulations and on an

annual basis, the Commentar wil be

amended to reflect subsequent enactments.

This approach represents a significantly

reduced form of premption of state law from

former versions of TRADES and preserves

Treasur's preeminent interest in a uniforI

rules applicable to all holders of

interests in Treasur bok-entr secuties.

system of

Seion 357.12 Obtaining an Interest in a

eliminating that Parcipant's Security

Entitlement). In addition. if authorized under

over all oth~r interests i~ the Treasury bok­

applicable state law. Participants may enter

into ¡;g~mants with other Paricipants that.

United States.

as to the ?articipants, constiaite a tr,sfer.

either the

entr security may be perfected by

any

United States or a Federal Reserve Bank.

method a\'ailable under applicable state law

as

determined

under

§

357.10(b)

or '

(b) Creation and Priority of a Security Interest

§ 357.11.ti The perfection and priority of

(i. Securit~'.nterests of

the United

States. such interests shall be gO\'erned by

Section 357.i2(b) providés that a security

applicable law. Secnty inte~sts under this

interest in favor of the United States has

section may include secty interests in

priority over the interests of any other person favor of a Federal Reserve Bank. such as a

in a Treasur bok-entr secnty. The United clearng lien or pledge by a non-participant

States obtains security interests in Treasur

secuities as collateral to secu funds in a

variety of situations such as Treasury Ta;c

and Loan accounts; governent agency funds

or funds under the contrl of the Federal

Cour held at financial institutions; and

securities pledged in lieu of surety by

contrctors and others. The pnonty provided

the United States in these situations is

(a) Creation of a Participant's Security

consistent with existing law.

A Participant's interest in a Treasur book.

entr secuity is a Securities Entitlement.

Setion 357.12(a) provides that a

Paricipant's Secunties Entitlement is crated

when a Federal Reserve Bank indicates by

bok entr that a Book-entr Security has

been crdited to a Paricipant's Securitiès

Account. Instead of the concept of initial

crdit and transfer of a Treasury hook.entr

secrity. as set forth in the existing

regulations. this proposal focuses on the

creation of a Paricipant's Securities

Entitlement and. in this way. is similar to

Section 8-501 of Revised Aricle 8.

The regulation focuses on the creation of

a Participant's Security Entitlement because

Security Entitlement is the term used to

describe the Participant's interest in a

Treasur book-entr secunty. Once a

Paricipant obtains that interest. the

regulation sets fort what that interest is.

Thus. as provided in § 357.10. federal law

describes a Paricipant's rights against the

United States and the Federal Reserve Bank

where it maintains its Securties Account. To

the extent not inconsistent with § 357.10,

§ 357.11 describes the applicable law to

determine Paricipants' rights and obligations

with respect to all other persons. Under these

regulations. Participants can still trnsfer

their interests in a Treasur book-entr

secrity as they did beforey issuing a

Transfer Message to the Federal Reserve Bank

where they hold such interest. Transfer of

interests between Paricipants can occu by a

Paricipant holding such interest issuing a

Transfer Message. As a result of such

message. the Federal Reserve Bank \vill make

a book entry in favor of

the receiving

Participant (thereby creating a Security

Entitlement in favor of such Paricipant) and

also wil make a book entr deleting the

initiator Paricipant's interest in such

Treasur book-entr security (thereby

10 Alabama. Alaska. Arizona. Arkansas. Colorado.

In addition, Federal Reserve Banks do

recognize on their boks and records secunty

interests in favor of the United States. In that

situation. the Federal Reserve Bank wil not

trnsfer the secuity without the permission

of the United States. This section provides

that a Federal Reserve Bank may rely

exclusively on the dirctions of an

the United

States to trnsfer a secuity and is protected

in so relying. Ordinarily. an authorized

representative of the United States would

authorized representative of

take such action under circmstances such as

the pledgor.

(i) Security Interests on the Books of a

Reserve Bank. Where required by Federal law

or regulation or pursant to a specific

agreement with a Federal Reserve Bank. a

security interest in favor of a Federal Reserve

Bank or other person may be created or

perfected by a Federal Reserve Bank marking

its books to record the secunty interest under

§ 357.12(c)(1). An example of a security

interest that is marked on the books of a

Federal Reserve Bank would be the pledge in

Revised Article 8. a Federal Reserve Bank

would be trated as a clearng corporation

under the applicable state law.

If a Person perfects a secrity interest

puruant to § 357.12(c)(2), obligations of the

Treasur and the Federal Reserve Banks with

respet to that security interest are limited.

Specifically, unless special amgements are

agreed to by the United Stattls or a Federal

Reserve Bank puruant to § 357.12(c)(1).

neither the Federal Reserve Bank nor the

United States wil recognize the interests of

any person other than the person in whose

secrities account the interest in a Treasury

hook-entr security is maintained. This does

not mean that such a security interest is

invalid. Rather. it means that the crditor's

recoure wil be solely against the debtor

Participant or other third party.

Section 357.13 Rights and Obligations of

Treasury and the Reserve Banks

(a) Adverse Claims

Section 357.13(a) sets fort the general rule

that. with limited exceptions. Treasury and

the federal Reserve Banks wil recognize

only the interest of a Paricipant in a

Treasur book-entr secuity in whose

Securities Account such interest is

maintained.

Participant's book-entr sécunties as

collateral for a discount window loan. tt For

limited categories of pledges. Federal Reserve

Banks may agree to record a security interest

in favor of a third par on their books. 'For

Federal Reserve Bank frquently wil hold

example. in some circmstances a Federal

Reserve Bank may permit the establishment

of a pledge account to hold bok-entr

interests in Treasury bok-entr securities for

their customers (which can include broker.

dealers and other Securities Intermediaries)

and in certain cases those customers will

hold interests in securities for their

customers. Accordingly. neither Treasury nor

a federal Reserve Bank wil know the

identity or recognize a claim of a

securities pledged to governmental entities

other than the United States governent. It

is important to note that there is no

obligation for either Treasury or a Federal

Reserve Bank to agree to record a security

interest on the books of a Federal Reserve

Bank. except as required by Federal law or

Participant's customer if that customer were

to present it to Treasury or a Federal Reserve

regulation. 1£ they do so. the security interest

Bank.

is perfected when the Federal Reserve Bank

records a security interest on its books, In

In addition. except in the limited case

where a security interest is marked on the

addition. the security interest has priority

books of a federal Reserve Bank pursuant to

II Book-entry securities pledged by a non.

Participant

to a Federal Reserve Bank generallj'

federal Reserve Bank wil recognize the

§ 357.i2(c)(i), neither the Treasury nor a

would be deposit.d by the non.Participant's

the

Federal Reserve Bank. and therefore also would be

marked on the books olthe Federal Reserve Bank.

Virginia. Washington. West Virginia. Wyoming.

entr secunties held through a

As noted previously. Treasur book-entry

secrities màintained in TRDES are held in

a tiered system of ownership. The records of

a Federal Reserve Bank reflect only the

ownership at the top tier. Institutions

maintaining a Securities Account with a

favor of a FedGral Reserve Bank of a

Louisiana. Marvland. Massachusetts. ~innesota.

:-lississippi. N';hraska. New Mexico. Oklahoma.

of bok.

Securities Intermediar where the securities

have not been deposited to a Federal Reserve

Bank pledge account. Consistent with

the default or insolvency of

Idaho. Iowa. llinois. Indiana. Kansas. Kentucky.

Oregon. Pennsylvania. Texas. Utah. Vermont.

aii Oter Security Intt'rests. As provided

in § 35ï.12(t:)(2), a secrity interest in a hook­

Such action is without effect to

Book-entry Security

Entitlement

entr security except an interest of the

Securities Intermediary to a pledge account at

See the discussion under O. (§ 357.10).

claims of any other person asserting a claim

i: Under both of these sections. if the state has not

yet adopted Revised Article 8. the applicable law

would be that slate's law as it would be amended

by Revised Aricle 8.

Federal Register I Vol. 61. No. 165 / Friday, August. 23, 1996 / Rules and Regulations

in a Treasur book-entr security. Persons at

levels below the Participant level must

present their claims to their Securities

Intermediar.

(b) Payment obligations

Section 357.13(b) contains a cor~llal) ~o

the rule set forth in § 357.13(a). This section

provides that Treasury dischares its

payment responsibilty with respect to a

security that it has issued when a Federal

Reserve Bank credits the funds account of a

Paricipant with amounts d~e on that

security or makes payment i~ ~ome oth~r .

manner specified by the Paricipant. This is

consistent with existing law and the first

TRADES proposal.ii In Revised Aricle 8, the

issuer discharges its obligations when it

makes payment to an owner registered on its

books. Under common commercial practice,

the registered owner in the indirect system

, may be a clearing corporation or the clearing

corporation's nominee. Although the Federal

Reserve Banks are treated as clearing

corporations under both Revised Article 8

and TRADES. Treasury remains liable until

pa~'Tent is made to. or in accordance with

the instrctions of. a Participant. Section

357.13(b)(2) establishes the mechanism of

how Treasury book.entr securities are paid

at maturity. It is intended to cover a variety

of procedures, including where the proceeds

of pledged securities are credited to a

suspense account pending substitution or

release. This paragraph makes clear that the

payment takes place automatically and that,

unlike with physical certificates. there is no

act of presentment required by the

Participant.

Section 357.1-l Authority of Reseii'e Banks

Section 357.14 provides that Federal

Reserve Banks are authorized. as fiscal agents

of

Treasury. to operate the commercial book.

entr system for Treasury.

Section 357A4 Notices

Section 357.44 contains a revised version

of a provision that appeared in earlier .

TRADES proposals. Similar to the rule in

and obligations of the United States and the

Federal Reserve Banks (except for those

matters involving Federal Reserve Banks set

forth in § 357.10(b)). Thus. for example.

Treasury discharges its payment obligations

with respect to a security it has issued in the

manner described in § 357.13(b). Federal la\v

both defines the payment obligation and

describes how Treasury fulfills that

obligation. Those portions of Revised Article

8 dealing with issuer obligations are not

applicable to Treasury or the Federal Reserve

Banks.I" Similarly, with certin limited

exceptions as set fort in § 357.12(c)(1),

specified securities. Paricipant .\ wil

instrct the Federal Reserve Bank to trnsfer

its interest in the Treasury security to

Participant B against simultaneous credit of

cash. The Federal Reserve Bank \\'ii debit

Paricipant A's security account and credit

Paricipant B's security aCCOunt azid

simultaneously credit Participant

A's cash

account and debit Paricipant B's cash

account. Participant A wil mark its books to

show that it has debited Dealer A'~ securities

account and credited Dealer A's cash

wil recognize any claim by Dealer or

Investor.

IS

In the hypothetical above. as between

Participant and Dealer, Paricipant is the

Securities Intermediary. With respect to the

matters set forth in § 357.11(a), the law of the

Securities Intermediary's jurisdiction

governs. Thus, with respect to the matters in

§ 357.11(a), the law of Participant's

jurisdiction applies as between Participant

'6 If Participant's jurisdiction, as

determined under § 357.11(b), has not

and Dealer.

adopted Revised Aricle 8, the law of

Participant's jurisdiction, as it would be

amended by Revised Article 8, applies.

Similariv. as between Dealer and Investor.

Dealer is a Securities Iiitermediary. with

account. Participant B wil mark its books to

show the Security Entitlement in the

Treasur security in favor of Dealer B and a

debit against Dealer B's cash account. Federal

law, set forth in § 357.12(a) provides that

Participant B acquires its interest in the

Triiólsur book-entr security when the

Federal Reserve Bank indicates by book-entry

that the interest in the security has been

credited to Participant B's Securities

Account. Pursuant to § 357.11(a). but subject

to § 357_11(d). Participant B's jurisdiction

governs Dealer a's acquisition of a Securities

Entitlement from Participant B.

HYPOTHETICAL 3

TREASURY

FEDER.\L RESERVE BA:-K

respect to the matters in § 357.11(a), the law

of Dealer's jurisdiction applies as between

Dealer and Investor. If Dealer's jurisdiction

has not adopted Revised Article 8, the law of

Dealer's jurisdiction, as it would be amended

by Article 8. applies.

HYPOTHETICAL 2

TREASURY

II II

FEDERAL RESERVE BANK

PARTICIPANT A PARTICIPAi\lT B

'a Treasury book-entry security to Dealer B.

The trnsaction likely would take the

following form. Dealer A wil instruct

DEALER A DEALER B

Assume that Dealer A sells its interest in

Participant.. to trnsfer its interest in a

Treasury security to Paricipant B against

TREASURY

'.As provided in § 357.14. Federal Reserve

FEDERAL RESERVE BANK

Paricipant B to trnsfer cash to Participant

A against delivery of an interest iii the

recognize only the interest of a Participant in

a Treasury book-entr security in whose

Security Account the interest is maintained.

Accordingly, as a matter of federal law,

neither Treasury nor a Federal Reserve Bank

whether a Federal Reserve Bank is required

to honor any such order or notice.

HYPOTHEICAL 1

cash payment. Dealer B wil instnct

Treasur and the Federal Reserve Banks wil

Revised Article 8 (see section 8-112), it

provides where certain legal process should

be directed. While providing instrctions on

where notice should be directed, it makes

clear that the regulations do not establish

J. Hypotheticals

43635

Banks. among other things. effect transfers of book.

entry securities between Participants' Security

I

. PARTICIPANT

Assume Participant wishes to o:i:ain a loan

from Federal Reserve Bank and. as :iart of the

transaction. will grant Federal Re;e~'e Bank

a security interest in its Securities

Entitlement with respect to Treas14"Y book-

entry securities. The transaction can be

accomplished in one of

two ways. Pursuant

to §357.12(cJ(1). the Federal Rese:o'e Bank

can mark its books to reflec the security

interest. ..s a matter of federal law. that

action creates and perfects the Federal

Reserve Bank's security interest and grants

the Federal Reserve Bank priority over all

other claimants (other than the United States

pursuant to § 357.12(b)),1 A second method

for completing the trnsaction, as set forth in

§ 357.12(c)(2). would be to take whatever

actions are authorized by applicable law. In

that case. applicable law is the law of the

jurisdiction of the head offce of the f'edernl

Reserve Bank. If that jurisdiction had

adopted Revised Article 8, it would be the

law or that jurisdiction. If that jurisdiction

had not adopted Revised Article 8, it would

DEALER

Accounts.

"One co:nent questioned whether similar

language in ihe March 4. 1996 release implied that.

under Revised Article 8. in ihe above example

I

Investor could have a claim against Participant. No

Rl!SCfve Bank may enter into an agreer:e:it under

such implication was intended. The only point of

the language is to make it clear that Federal. not

state. law go"erns the rights an4 obligations of

which it agrees to record on iis books an interest

I

P ARTICIP A.'I

I

INVESTOR

The first hypothetical is designed to show

what law applies at different levels of the

tiered book-entry system. TRADES provides

that federal law. and only federal law

(defined in § 357.10(a)), governs the rights

Treasury and the Federal Reserve Banks.

.. As descrihed in the March 4 Release. the scope

of TRADES is limited. As a general rule. if a matter

is not covered in § 357.11(a). TR..\DES is not

applicable. One comment questioned whether

TRADES covered the creaiion and attachment of a

OJ 51 FR 88-16.88-18 (\Iarch 1-1. 1986).

security interest. The omission of creation and

attachment in § 357.ll(a) is intentionaL.

I' In certain limited circumstances. a Federal

in Participants book.entry securities in favor of a

non.Participant. such as a governmental entity.

Under ihese circumstances. the non.Pe=iicipant

would ha,'e a perfecied security interest with

priority o"er other claimants (oiher than the United

Slates under § 357. nIb)). It should be noted that.

as set forth in § 357.12(c)(I). there is no :equiremçnt

that either the United States or a Feder.l Resen'e

Bank agree to creation and perfection 0: e security

interest in this \...ay. except as provide¿ i:i

§ 357.1 Z(cl( t I.

43636

Federal Register I Vol. 61, No. 165 I Friday, August 23. 1996 i Rules and Regulations

be the law of that jurisdiction as if the

jurisdiction had adopted Revised Article 8.

Under Revised Aricle 8. the Federal Reserva

Bank's interest would be that of a clearing

corporation.

HYPOTHTICAL 4

TRASURY

If

FEDERAL RESERVE BANK

PARTICIPA!'ï A PARTICIPMï a

Dated:

"Aiig'.St 16, 1996.

Gerald Murhy.

in 31 CFR Par 357, Subpart B (the ns

Fiscal Assistant Secretary.

(FR Doc. 96-21469 Filed 8-20-96; 1:29 pml

BllUNG COOE "'10-_

Security Entitlement in Treasury book-entry

Paricipants.

HYPOTHEiIC..iL 5

1986, which were offered in definitive

31 CFR Parts 306, 350, 356, and 358

Conforming Book-entr Changes

AGENCY: Bureau of the Public Debt,

FEDERAL RESERVE BANK

I

PARTICIPAl''T A

I

DEALER A

as a separate rule

making document on

this date. The changes are technical and

non-substantive.

EFFECTIVE DATE: January I, 1997.

FOR FURTHER INFORMATION CONTACT:

Walter T. Eccard. Chief Counsel (202)

SUPPLEMENTARY INFORMATION: fn a

Participa¡it A to deposit securities to a pledge

is publishing a final rule that. on and

after the effective date. wil govern

Treasury bonds. notes. and bils

trnsaction could take place iš by any

method permitted by the law of Dealer A's

(Bank A's Securities Intermediary)

jurisdiction. This could im'olve a tri-party

agreement among the Federal Reserve Bank,

Dealer A. and Bank A. As set forth in

.§ 35ï.ll(b)(i). .that agreement

likely would

specify which jurisdiction's lâw is to govern

the transactio:! and could specify that such

choice of law supersedes any other choice of

law agreement previously entered into by

Dealer A and Bank A. If Dealer .-\'s

jurisdiction has not adopted Re\'ised Article

8. the applicable law would be the law of

pealer A's jurisdiction as it would be

.¡mended hy Revised Article 8.

definition of "Definitive Treasury

secunty" is being retained, but

otherwise the definitions in 31 CFR

§ 357.3 wil apply. Revised § 306.117

contains the rules for withdrawal of

Eligible book-entry Treasury securties

§§306.118(d) and (tand 306.119. All

other provisions of current Subpart 0

books of a Federal Reserve Bank. Such a

transaction would take place in the following

fashion. Bank A could ha\'e Dealer A instruct

account at the Federal Reserve Bank and

credit the account created by the Federal

Reserve Bank. The second wa" the

secunty" has been added and the

governing book-entr Treasury Bonds,

21~-3320, or Cynthia E. Reese, Deputy

BANK A

Chief Counsel. (202) 219-3320. Copies

Assum~ that Bank A wishes to borrow from of the final regulations are being made

'¡ ~he Fed~ral Reserve Bank and will pledge its

available for downloading from the .

! interest in Treasury book.entry securities

Bureau of the Public Debt home page at

held at Dealer A to collateralize that loan.

the following address: http://

The transaction could be accomplished in

www.ustreas.gov!treasury/bureaus!

two ways. Pursuant

to § 357.12(c)(1), the

interest could :ie created and oerfected on the pubdebt!pubdebt.html.

instrct the Federal Reserve Bank to debit its

In revised § 306.115. a new defiition

of "Eligible book-entr Treasurv

for conversion to definitive form. It is

based on provisions in former

I

account specified by the Federal Reserve

Bank. The Federal Reserve Bank likely would

create an account on its hooks and specify

that account to Bank A as the account to

receive Bank ..~:5 interest in Treasury book­

entr securiti.:s. Participant A. upon

receiving Dealer "'''s instrctions. would then

(certficated) form.

to conform existing miscellaneous

regulatory provisions to new regulations

Notes andBils that are being pubiished

TREASURY

entr. Those provisions only apply to

secunties issued before August 15,

. Fiscal Service

transaction would be completed pursuant to

Fiscal Service. Treasury.

applicable law determined in accordance

with 357.11. Although such an interest could ACTION: Final rule.

be recorded on the books of a Federal Reserve

Bank under § 357.12(c)(1). Federal Reserve

.SUMMARY: The Deparment of the

Banks generally do not mark their books to

Treasury is publishing final regulations

record this type of security interest for

provisions that wil continue to have

any force on and after the effective dat

for withdrawal of secuties from book­

DEPARTMENT OF THE TREASURY

Paricipant B a security interest in its

securities. As provided in § 357.12(cl(2). the

"TRES" regulations). The only

are those dealing with the procedures e

Asswne that Paricipant A wishes to

borrow from Paricipant B and grnt

being supplanted by the new regulatio

separate publication in this Federal

Register. the Department of the Treasury

(Treasury secunties) in book-entrv form

held in the commercial book-entr;"

system (31 CFR Part 357). That ru"le

incorporates by reference recent and

signifcant changes in commercial

law

addressing the holding of securities in

are covered by TRAES or are obsolete.

Part 350

This Part contained the regulations

governing Treasury bils that wer~

offered exclusively in book-entry form.

beginning in 1976.\ Subpart C of Part

350, which related to dirp.ct access

Treasury bil accounts: was supersed~d

hy the TREASURY OlRECl regulations

in Part 357. Subpart C. Subpar B of Part

350. which related to Treasury bills held

in the comm~rcial book-entry system.

was applicable until promulgation in

1993 of

the uniform offering circular, 31

CFR Part 356 (Sale and Issue of BookEntr Treasur)' Bils, Notes. and Bonds.

Department of the Trp.asury Circular,

Public Debt Series No. 1-93). Under

§§ 356.3 and 356.5, Tr~asurv bills were

made subject to 31 CFR par 306 and

357. Because Treasury bills have a

maturity of no longer than one year.

there are currently no unmatured

Treasury bils subject to Part 350.

Therefore. Par 350 is being removed.

book-entry form through intermediaries.

The rule replaces existing Treasury

Part 356

regulations that contain outdated legal

replace references to 31 CFR Part 306

concepts.

In this rulemaking document. existing

.Treasury regulations are being amei:ded

to conform to the changes in Part. 357.

No other changes of a substantive nature

are being made. These \'arious technical

changes are summarized below.

Part 306

Subpart 0 of Part 306 contains the

provisions governing book-entry

Treasurv securities that have been in

All of

the changes in this Part either

with Part 35'7. or add references to

TRADES.

Part 358

One change is being made to Section

358.3 to delete language that will no

longer apply as a result of the

ptiblication ofTR.-\DES.

Procedural Requirements

This ruleníaking does not meet the

criteria for a "significant regulatory

effect fo'r over twenty years. :\Imost all

of these pro\'isions. including those

dealing with transfer and pledge. are

i (Subpar: 0 of Part 350 provided f.or iSSUAnce of

d~finiii1/t: bit!:; ll:l an exception bdSis for a li:nitcd

period of time.)