Government Securities Act Regulations: Large Position Rules

SUMMARY: The Department of the Treasury (``Department'' or

``Treasury'') is publishing for comment proposed rules that would

establish a new Part 420 providing recordkeeping and reporting

requirements pertaining to large positions in certain Treasury

securities. The proposed regulations are being issued pursuant to the

Government Securities Act Amendments of 1993, which authorized the

Secretary of the Treasury to prescribe rules requiring persons holding,

maintaining or controlling large positions in to-be-issued or recently-

issued Treasury securities to keep records and file reports of such

large positions.

The proposed recordkeeping rules require any person or entity that

controls a position equal to or greater than $2 billion in a Treasury

security to maintain and preserve certain records that enable the

entity to record, compile, aggregate and report large position

information. The proposed reporting rules require entities to file a

large position report with the Federal Reserve Bank of New York if

their reportable position equals or exceeds the large position

threshold in a particular Treasury security as specified by the

Treasury in a notice requesting large position information. The

Department's proposed large position rules are intended to provide the

Treasury and other securities regulators with information on

concentrations of control that would enable them to better understand

the possible reasons for apparent significant price distortions and the

causes of market shortages in certain Treasury securities.

DATES: Comments must be received on or before February 16, 1996.

ADDRESSES: Comments should be sent to: Government Securities

Regulations Staff, Bureau of the Public Debt, Department of the

Treasury, 999 E Street, N.W., Room 515, Washington, D.C. 20239-0001.

Comments received will be available for public inspection and copying

at the Treasury Department Library, Room 5030, Main Treasury Building,

1500 Pennsylvania Avenue, N.W., Washington, D.C. 20220.

FOR FURTHER INFORMATION CONTACT: Ken Papaj, Director, or Don Hammond,

Assistant Director, Government Securities Regulations Staff, at 202-

219-3632. (TDD for the hearing impaired is 202-219-3988.)

SUPPLEMENTARY INFORMATION:

I. Background

Statutory Authority

In response to certain events that occurred in the government

securities market in 1990-1991--short squeezes in the two-year Treasury

notes issued in April and May 1991 and bidding improprieties in several

auctions of Treasury securities in 1990-19911--Congress included

in the Government Securities Act Amendments of 1993 (GSAA)2 a

provision granting the Department the authority to write rules for

large position reporting in certain Treasury securities. Specifically,

Section 104 of the GSAA, which amended Section 15C of the Securities

Exchange Act of 1934,3 authorizes the Treasury to adopt rules

requiring specified persons holding, maintaining or controlling large

positions in to-be-issued or recently-issued Treasury securities to

maintain records and file reports regarding such positions.4 This

provision is intended to improve the information available to the

Treasury and other regulators regarding very large positions of

recently-issued Treasury securities held by market participants and to

ensure that regulators have the tools necessary to monitor the Treasury

securities market.

\1\For a discussion of the events that gave rise to the

establishment of large position reporting authority, see the Joint

Report on the Government Securities Market, Department of the

Treasury, Securities and Exchange Commission and Board of Governors

of the Federal Reserve System, (1992); Salomon Brothers Inc. Press

Releases dated August 9 and 14, 1991; S. Rep. No. 103-109 (July 27,

1993); H.R. Rep. No. 103-255 (September 23, 1993); and 60 FR 4576

(January 24, 1995).

\2\Pub. L. No. 103-202, 107 Stat. 2344 (1993).

\3\15 U.S.C. 78o-5.

\4\Pub. L. No. 103-202, Sec. 104; 107 Stat. 2344, 2346-2348; 15

U.S.C. 78o-5(f).

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The GSAA gave the Department wide latitude and discretion in

determining several key features and conditions that would form the

underpinnings of the large position recordkeeping and reporting rules.

Among the most significant of these features were: defining which

persons (individually or as a group) hold, maintain or control large

positions; determining the minimum size of positions to be reported;

determining what constitutes ``control'' for the purposes of the rules;

prescribing the manner in which positions and accounts are to be

aggregated; identifying the types of positions to be reported;

determining the securities that would be subject to the rules; and

developing the form, manner and timing of reporting. The proposed rules

address these points.

Participation in Rulemaking Process/Solicitation of Comments

In formulating the process to be used to develop large position

rules, the Department, early on, made a decision to obtain the views of

the market participants who would be directly affected by such

regulations. We also decided that it would be useful to explain the

Department's initial thoughts on the structure and purposes of the

rules, to explore various conceptual approaches to designing a large

position recordkeeping and reporting system and to obtain industry

comment and feedback before actually drafting proposed rules. We

believed that market participant involvement in the rulemaking

initiative from its outset would facilitate greater understanding of,

and support for, the final rules when implemented.

Accordingly, in order to involve market participants and other

interested parties at the earliest phase of the rulemaking process, the

Department issued an Advance Notice of Proposed Rulemaking (ANPR) on

January 24, 1995.\5\ The ANPR addressed several key issues, concepts

and approaches to be considered in developing large position

recordkeeping and reporting rules, and solicited comments, suggestions

and recommendations regarding how the requirements should be

structured. Rather than repeating that information here, readers are

encouraged to review the ANPR to familiarize themselves with these

issues. The ANPR also contains a detailed historical background that

provides a fuller understanding of the events and circumstances that

resulted in the establishment of this regulatory authority, the

purposes and objectives to be achieved from large position rules, and

the Congressional intent behind this legislation.

\5\60 FR 4576 (January 24, 1995).

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The 90-day comment period on the ANPR was extended, in response to

an industry request, for an additional 30 days through May 24, 1995.\6\

In response to the ANPR, the Department received seven comment letters

which are summarized in the next section of the preamble.

\6\60 FR 20065 (April 24, 1995).

[[Page 65215]]

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In addition to considering the views expressed by the commenters to

the ANPR, Department staff has also consulted with various regulatory

agencies (i.e., staff of the Securities and Exchange Commission (SEC),

the Commodities Futures Trading Commission, the Board of Governors of

the Federal Reserve System and the Federal Reserve Bank of New York

(FRBNY)) in developing this proposal. We intend to continue to involve

interested market participants and the regulatory agencies in the

development of the large position regulations through the completion of

the rulemaking process. Accordingly, the Department welcomes and

strongly encourages market participants to submit comments on the

proposed rules and any suggestions for reducing burdens on the industry

while still achieving the objectives of the rules.

Balancing of Regulatory and Market Needs

The Department has attempted to strike a balance between achieving

the purposes and objectives of the statute and minimizing costs and

burdens to those entities affected by the regulations. For the

following reasons, we believe that the rules being proposed

successfully achieve this balance.

First, the proposed rules envision reports to be submitted only in

response to a specific request by the Treasury for large position

information on a particular Treasury security issue. Under this

approach, reporting should be an infrequent event required primarily in

response to pricing anomalies in a specific Treasury security rather

than a regular, on-going process resulting from a certain pre-

determined large position threshold being exceeded in a broader range

of securities.

Second, the proposed rules establish a minimum large position

threshold of $2 billion below which the Treasury would not request

large position reports. As a result, we believe that very few entities

would be required to file large position reports.

Third, the recordkeeping requirements would generally not apply to

any reporting entity (as defined in the rules) that did not control a

position that equalled or exceeded $2 billion in a Treasury security.

Fourth, for those entities currently subject to recordkeeping rules

of the SEC, the Treasury or the bank regulatory agencies, the proposed

rules impose only minor additional recordkeeping requirements and only

if certain conditions are present. Finally, the proposed rules adopt

several concepts from the Treasury's auction rules (e.g., positions to

be included in a reportable large position, definition of a reporting

entity and method of aggregating positions) which have been in effect

since March 1993 and are understood by many of the major participants

in the Treasury securities market.\7\ This should reduce the time and

costs that affected entities will need for training their employees on

the large position rules.

\7\Uniform Offering Circular for the Sale and Issue of Treasury

Bills, Notes and Bonds, 31 CFR Chapter II, Subchapter B, Part 356.

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Scope of Large Position Rules

It is important for all market participants to recognize that large

position rules create a requirement to maintain records and report

information about such positions. However, these requirements only

apply to entities that hold or control (i.e., exercise investment

discretion) large positions, as determined by the Department, in

specific Treasury security issues. Accordingly, there is no obligation

on executing brokers and dealers to report large trades nor is there an

affirmative duty to inform their customers of the large position

recordkeeping and reporting requirements being proposed as part of this

rulemaking.

The Department reiterates that large positions are not inherently

harmful and there is no presumption of manipulative or illegal intent

on the part of the controlling entity merely because a position is

large enough to be subject to the Treasury rules. In addition, the

proposed rules do not establish trading or position limits or require

the identification of large traders or the reporting of large trades.

Finally, the GSAA specifically provides that the Department shall not

be compelled to disclose publicly any information required to be kept

or reported for large position reporting. In particular, such

information is exempt from disclosure under the Freedom of Information

Act.8

\8\5 U.S.C. 552(b)(3)(B).

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II. Comments Received in Response to ANPR

Seven comment letters were received in response to the ANPR. The

letters were submitted by two trade organizations, one primary dealer,

a Federal Reserve Bank, a bank regulatory agency, a commercial bank and

an insurance company.9 While all comments are summarized below,

each letter did not necessarily address all aspects of the ANPR.

\9\Public Securities Association, Investment Company Institute,

Chemical Securities Inc., the Federal Reserve Bank of New York, the

Board of Governors of the Federal Reserve System, Chemical Bank, and

CNA Insurance Companies, respectively.

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Six commenters were largely supportive of a large position

reporting system provided that such a reporting system would not be

overly burdensome for market participants. However, one commenter

opposed the concept of large position reporting entirely. This party

believed that ``the current auction reporting rules have already

addressed adequately the prior problems with market manipulation,'' and

that an unintended consequence of large position rules could be fewer

participants in the government securities market, which, in turn, would

result in higher borrowing costs.

On-Demand vs. Automatic Reporting

Five commenters supported an on-demand reporting system which would

be triggered by specific requests from the Treasury for large position

information on a particular Treasury security. One respondent, however,

favored an automatic, regular reporting system triggered whenever a

reporting entity's holdings in a security reached a certain threshold.

The primary reason expressed by those commenters favoring an on-

demand reporting system was that this approach would be significantly

less burdensome and costly than an automatic reporting system. Many

commenters noted that an automatic reporting method would impose more

complex systems development requirements and greater operational costs

due to the need for daily monitoring of positions across multiple

securities. In addition, automatic reporting could create a

disincentive to buy and hold large positions that exceed a fixed

reporting threshold. Finally, on-demand reporting was viewed by several

respondents as being better able to address price distortions and

provide more useful information since the request for large position

information would be targeted to specific market situations and

security issues.

The respondent favoring an automatic reporting system argued that

on-demand reporting ``would be difficult and costly to communicate to

all relevant parties.'' The commenter also felt that on-demand requests

might trigger unwanted market reactions, while a regular reporting

system ``would provide more consistent monitoring of the market and

would be less confusing to the market over time.''

Definition of Reporting Entity

Six commenters were in agreement that the definition of ``reporting

entity'' should conform with the definition of ``bidder'' as defined in

the uniform

[[Page 65216]]

offering circular.10 The aggregation rule with regard to

affiliates, for example, is a concept with which many market

participants are already familiar and provides an appropriate model for

a large position reporting rule. Similarly, the commenters supported a

process, similar to the ``separate bidder'' process provided for in the

uniform offering circular, by which separately managed entities within

a corporate or partnership structure can request that Treasury

recognize them as separate reporting entities.

\10\31 CFR 356.2 and Appendix A.

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Definition of ``Control''

There was similar concurrence on the definition of ``control.''

Nearly all parties that addressed this issue expressed the view that

control should be evidenced by either proprietary ownership or

investment discretion over a Treasury security. The commenters were in

similar agreement that the concept of ``control'' should not be

extended to merely beneficial ownership or custodians. Specifically,

the commenters held that entities acting as custodians should not be

required to report positions in Treasury securities over which they

have no investment discretion.

Definition of ``Large'' Position

The commenters generally felt that the large position threshold

should be large enough to both detect concentrations of control and

avoid overly burdensome, frequent reporting by market participants.

Opinions were fairly evenly divided on whether a securities position

should be defined as ``large'' based on a percentage of the total

outstanding issue size or a specific dollar amount.

Those preferring a percentage standard commented that this method

is a better indicator of concentration of control than a straight

dollar standard, given the large range of issue sizes among various

maturities. Suggested percentages ranged from 10 percent to 25 percent

of a particular issue. One commenter felt that, if an automatic

reporting system is implemented, the percentage should be consistent

with the Treasury's auction rules, i.e., ``large'' should be defined as

35 percent of the securities awarded in an auction.

Those favoring a fixed-dollar threshold did so on the basis of

clarity, ease of administration, and, consequently, improved

compliance. Suggested dollar thresholds ranged from $2 billion, to

correspond to the net long position reporting threshold for

auctions,11 to $4-5 billion. Some commenters also expressed the

view that the threshold should be larger under an automatic reporting

system than under an on-demand system to minimize the compliance burden

associated with automatic reporting. One commenter said that there is

no need to define ``large position'' in advance under an on-demand

reporting system (the large position threshold would be specified in

the Treasury notice requesting large position reports), and there may

be no ``one-size-fits-all'' threshold.

\11\31 CFR 356.13(a).

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Definition of ``Recently-Issued''

The scope of Treasury's large position reporting authority is

limited to recently-issued and to-be-issued Treasury securities.

Discretion to define the term ``recently-issued'' was given to the

Treasury. Although the commenters differed somewhat on the specifics of

the preferred meaning of ``recently-issued,'' all agreed that it should

include the ``on-the-run''12 (most-recently issued) security of a

particular type. Opinions were fairly evenly divided on whether

``recently-issued'' also should include only the most recent ``off-the-

run'' issue or the two most recent ``off-the-run'' issues. One

commenter said that there is no need to define ``recently-issued''

under an on-demand reporting system.

\12\A Treasury security is considered to be ``on-the-run'' when

it is the newest security issue of its maturity (e.g., in October

the two-year note issued September 30 would be ``on-the-run'' while

the two-year note issued August 31 would be ``off-the-run''). An on-

the-run security is normally the most liquid issue for that

maturity.

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Types of Securities Covered

Based largely upon the presumption that Treasury note and bond

issues are more likely to be ``on special''13 (in short supply)

than bills, two commenters said that bills should be excluded from

large position reporting. One such commenter also cited the complexity,

burdens and costs ``associated with implementing systems to track

positions on weekly-issued securities * * *.'' One commenter, however,

said that all types of Treasury securities (bills, notes and bonds)

should be eligible for reporting, ``since any type of Treasury security

could be the subject of a concentration of control.'' Another commenter

took a more neutral position, saying that excluding bills may be

appropriate, ``but a good case will need to be made that short interest

is always small relative to the net supply, or that supply conditions

and price movements preclude sustained and possibly injurious

squeezes.''

\13\When securities are ``on special,'' market participants

desiring to borrow the particular security must accept an interest

rate significantly lower than the prevailing repo rate for

unspecified collateral. Conversely, the owners of the securities can

finance their position at exceptionally low interest rates.

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Components of a Position

The four commenters addressing this issue agreed as a starting

point that net long settled cash positions should be included in a

``large position.''

Two commenters said that the definition of ``large position''

should be consistent with the definition of ``net long position'' in

the uniform offering circular.14 Both felt that financing

transactions (repos, securities borrowed, etc.) should be excluded from

the large position calculation since it is too difficult to apply the

concept of control to securities used in such transactions. Calculating

a net financing position is particularly difficult, according to one of

the commenters. Examples provided included the problems of

differentiating deliver-out from hold-in-custody and tri-party

repurchase agreements, and of separating overnight repos from term

repos, particularly those with mandatory substitution provisions. Both

of these commenters, however, could support a requirement to report

financing transactions on a gross basis if Treasury believes financings

need to be included.

\14\31 CFR 356.13(b).

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The other two commenters felt that financing transactions should be

included in the definition of a reportable position to encompass a

wider range of transactions from which an entity can exert immediate

control over a Treasury security. Both advocated reporting such

transactions on a gross basis. One commenter noted that a position that

might look flat on a net basis may in fact be exposed if fails become a

problem. Moreover, the commenter contended, matched-book and tri-party

repo activity might result in a small net position, and yet be used as

a tool to achieve a short squeeze.

Recordkeeping Requirements

The issue of what records should be kept by reporting entities was

largely unaddressed except that the commenters felt that these records,

and their associated retention periods, should closely correspond to

records already required to be maintained by reporting entities under

existing securities and banking laws. Most respondents stated that

reporting entities should not be required to keep records in electronic

form, since such a

[[Page 65217]]

requirement could be burdensome for entities that do not have systems

for electronic recordkeeping.

III. Section-by-Section Analysis of Proposed Regulations

A. Section 400.1. Scope of Regulations

A new paragraph is proposed to be added to Part 400 to describe the

statutory basis for the large position rules. The paragraph also states

that the large position rules are located in Part 420.

B. Part 420. Large Position Reporting

1. Section 420.1

Applicability. This section sets out the scope of the large

position recordkeeping and reporting rules by identifying the types of

Treasury securities covered and by defining the universe of entities

potentially affected. Section 420.1 reflects the Department's initial

determination that all marketable Treasury securities--bills, notes and

bonds--should be included within the scope of the rules. However,

arguments have been made that features and characteristics of the bill

market, such as the frequency of issues (i.e., weekly) and reopenings,

the size of bill auctions and the availability of several instruments

that are close substitutes for bills (e.g., various money market

instruments), make it more difficult to accumulate concentrations of

ownership of Treasury bills. Comments are specifically requested on

whether Treasury bills should be included in the large position

recordkeeping and reporting rules.

On its face, part 420 applies to any type of entity, foreign or

domestic, that might control a large position in a specific Treasury

security. This broad construct of potential application is consistent

with the statutory purpose: ``Large position reporting also would be

useful in assuring that regulators can monitor the positions of major

market participants other than government securities brokers or dealers

under certain circumstances. In particular, it will provide assurance

that the government can compel disclosure of position information when

necessary from all large market participants, including a group of

relatively unregulated entities called `hedge funds.'''15 As

described in the preamble discussion of sections 420.3 and 420.4, the

number of entities that may actually be affected by large position

rules is significantly narrowed when the minimum size for a large

position is applied.

\15\H.R. Rep. 103-255, September 23, 1993, at pg. 25.

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We believe it is appropriate to exclude certain entities from the

application of the rules based on the existing availability of position

information on these organizations and/or concerns about the

confidentiality of this information. Accordingly, paragraphs (b) and

(c) of section 420.1 provide exemptions from part 420 to the holdings

of foreign central banks, foreign governments, international monetary

authorities and Federal Reserve Banks (FRBs). The exemptions for the

foreign entities are limited to their respective positions maintained

at the FRBNY. The exemptions are also consistent with the position

expressed by the Senate and House during consideration of the

legislation.16

\16\139 Cong. Rec. H-10967 (daily ed. November 22, 1993)

Statement of Chairman Dingell on S. 422.

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One commenter, responding to the ANPR, expressed concern about

granting exemptions specifically to these foreign entities. However,

the Department believes the proposed approach is appropriate since the

exemptions are limited in their scope by applying only to the portion

of the organization's position that is maintained at the FRBNY. Any

positions held by the exempt entities at locations other than the FRBNY

are not exempted and will be subject to the large position

recordkeeping and reporting rules. The proposed exemption for those

Treasury securities that FRBs hold and control for their own accounts

is also based on the Department's access to this information.

The Department recognizes that on rare occasions it may be

necessary to request large position information on Treasury securities

that are not within the parameters of the proposed definition of

recently-issued (paragraph 420.2(g)) but that are within the scope of

the intent of the statute. For example, in August 1991, Treasury might

have sought large position information on the April 1991 two-year note,

given that the security was still ``on special'' in the repurchase

agreement market and there was a significant concentration of

ownership. While this security, at that time, would have been outside

the scope of the currently proposed definition, the Department believes

it is necessary to reserve the right to collect large position

information in such circumstances. Accordingly, we have included within

the rule a reservation to request information on additional Treasury

security issues consistent with the purposes of the GSAA.

2. Section 420.2

Definitions. This section provides for the definitions of terms

that are integral to the large position rules. Unless otherwise defined

in this section, terms used in part 420 have the same meanings provided

in section 400.3.

``Control''--The concept of control revolves around three elements:

beneficial ownership, possession (custody) and investment discretion.

The beneficial owner is the party with the actual ownership interest in

the Treasury security. The beneficial owner may or may not always be

aware of its ownership position in a given security if it does not

manage its own investments and it may not have possession of the

Treasury securities even if it makes its own investment decisions

(especially likely with book-entry Treasury securities). Possession or

custody is evidenced by an organization's ability to service the

securities directly (e.g., transfer the securities, receive interest

and principal payments). The beneficial owner may perform this function

for its own holdings, but the mechanics of book-entry Treasury

securities require that a depositary institution act in this capacity

on behalf of others at some level in the custody chain for all Treasury

securities. Additionally, book-entry Treasury securities may involve

more than one custodian in the holding of a specific security

entitlement.17 Investment discretion is the authority to make and

execute decisions about the purchase, sale and retention of securities.

In the institutional market for Treasury securities, which is of

critical importance in developing large position reporting rules, the

granting of investment discretion to an investment adviser to manage

all or some portion of an entity's portfolio is common.

\17\The Federal Reserve Banks maintain book-entry security

accounts for depository institutions and other entities such as

government and international agencies and certain foreign central

banks. In their book-entry accounts at the Federal Reserve, the

depository institutions may maintain their own security holdings and

holdings for customers, which may include other depository

institutions, dealers, brokers, institutional investors and

individuals. In turn, the depository institution's customers may

maintain accounts for their customers. This creates a tiered chain

of custodial relationships.

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It is our view that, for the purposes of large position reporting,

the most important criterion in the definition of control is that of

investment discretion. While beneficial owners receive the economic

benefit of holding a Treasury security, frequently, they do not make

the decision to purchase/sell/retain the Treasury security and, as

mentioned, may not, on a day to day basis, be aware

[[Page 65218]]

of their ownership interest. Since a purpose of large position

reporting is to understand better any pricing anomalies for a

particular Treasury security issue in a timely fashion, defining

control based on beneficial ownership would not be particularly useful

because a reporting entity could have difficulty assembling the

information needed to file a large position report and would be

potentially unaware of the reasons why the security involved was

purchased.

Likewise, custody (without investment discretion) does not provide

a good basis for determining control. A definition based on custody

would most certainly involve multiple reporting of the same security

position since each tier in the custody chain would be required to

report. This approach would diminish the value of any large position

reports received. Also, because under these circumstances the custodian

would not be a party to the investment decision, reporting on the

positions held in safekeeping would shed very little light on the

objectives of the investor.

Therefore, Treasury has decided to define control as the authority

to exercise investment discretion. This definition is supported in six

of the seven comment letters. Investment discretion can be exercised by

the beneficial owner, a custodian or an investment adviser. The party

responsible for making investment decisions, regardless of where it is

in the tiered system, is the most relevant reporting entity for large

position reporting since the actions and objectives of the decision

maker are what we are trying to determine. A single party exercising

investment discretion for multiple beneficial owners could control a

potentially large amount of Treasury securities without any single

beneficial owner having a reportable position. Additionally, such

investment advisers could possibly distribute custody of the securities

in a manner that would keep any individual custodian below the

reporting threshold. However, using the exercise of investment

discretion as a measure of control, an investment adviser's aggregate

positions would be reportable regardless of the number of beneficial

owners or custodians involved and would be treated separately from any

positions over which the beneficial owners had retained investment

discretion. Finally, a definition of control based on investment

discretion is consistent with the treatment of investment advisers

under the uniform offering circular.18

\18\Treasury intends to clarify this treatment in a proposed

rule in the near future.

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Following this definition, an investor would only be responsible

for reporting its proprietary holdings if it retained investment

discretion over the positions. This approach would avoid double

reporting of these positions. Additionally, a custodian would only have

responsibility for reporting on any large positions for which it had

investment discretion. A custodian would not have any obligation to

report on positions for which it maintained securities solely in a

safekeeping capacity.

``Reporting Entity''--This term is defined to be consistent with

the definition of a bidder in the uniform offering circular.19

This concept provides for the treatment of all affiliated entities as a

single entity for purposes of determining the quantity of Treasury

securities controlled. Additionally, the definition permits specific

affiliates to be treated separately or ``carved-out'' from the

reporting entity based on stated principles of separateness.

\19\See supra note 10.

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Applying this approach, a ``reporting entity'' will aggregate each

of the positions in a specific Treasury security that is held by itself

and all affiliates that control positions, and will report a single

position to the FRBNY. Any affiliate that exercises independent

investment discretion, and whose position information is not available

to other affiliates, will be permitted to report separately from the

overall entity provided it has requested such a ``carve-out'' and

received written recognition from the Treasury. Merely establishing

``Chinese walls'' or similar procedures is not sufficient. If an entity

has already received such written recognition under the uniform

offering circular, it will not have to reapply for the purposes of

large position reporting.

Defining the term ``reporting entity'' based on the bidder concept

from the auction rules has the advantage of relying on an existing body

of regulations, thus minimizing confusion and the need for market

participants to learn new rules. The bidder definition is well known to

most large participants in the Treasury market (from their auction

participation) and has functioned effectively since March 1993 when the

rules were implemented. This approach was also endorsed in four comment

letters.

This definition also introduces a new term, ``aggregating entity,''

which is defined separately. An aggregating entity is a single legal

entity (e.g., a parent company or affiliate within a reporting entity)

that may control elements of a large position. If an aggregating entity

has no affiliates, then it is also a reporting entity. Each component

of a reporting entity is individually an aggregating entity.

``Reportable Position''20--The scope of the definition of

reportable position directly affects the complexity of calculating such

a position and the amount of time needed to file a large position

report. The definition of a reportable position should be broad enough

to encompass the most significant ways that an investor may control a

Treasury security issue, balanced against the difficulty and cost of

compiling the information. Additionally, because of the complexity in

defining this term, it is useful to base the definition, to the maximum

extent feasible, on concepts familiar to market participants.

\20\A reportable position for the purposes of the large position

rules differs from a reportable position for purposes of the uniform

offering circular. In the uniform offering circular, a reportable

net long position is a position that has met the necessary criteria

to be reported on a tender. In the context of the large position

rules, a reportable position defines the components of a potential

large position.

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For participants in the Treasury securities market, a familiar

concept is that of ``net long position'' in the uniform offering

circular.21 The uniform offering circular definition includes the

par amount of: (1) Immediate (cash) positions; (2) when-issued

positions for to-be-issued and reopened issues; (3) forward settling

positions; (4) positions in futures contracts requiring delivery of the

specific security; and (5) STRIPS (Separate Trading of Registered

Interest and Principal of Securities) principal components of the

specific security. This is an appropriate place to begin development of

a reportable position because it is not only familiar to many market

participants but also includes the most common elements of control in

the cash market. The combination of these five elements is defined as

the net trading position--the first component of a reportable position.

\21\See supra note 14.

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The Department is requesting that commenters specifically address

the treatment of forward positions. While forward positions are a

component of the net long position defined in the uniform offering

circular, there may be reasons to exclude them from the definition of

reportable position because forward positions may be less effective in

controlling a security or may act to conceal settled positions. For

example, the proposed large position rules permit a reporting entity to

reduce the size of its settled position by the amount of a

[[Page 65219]]

short forward settling position. Should this treatment be permitted?

Treasury especially welcomes the views of market participants on this

subject.

Options and certain futures contracts (i.e., cash-settled or those

requiring delivery of securities other than the specific security that

is the focus of large position reporting) continue to be excluded

because they do not provide the holder with either immediate control or

an effective way to manipulate the price of a specific security. For

options, an entity would only gain control of the security at the time

the position is exercised, at which time the security would become a

component of a reportable position. Large positions in the excluded

futures contracts are already reported to the Commodity Futures Trading

Commission.22 Thus, this information will be available to the

Department and other regulatory agencies, if needed, without imposing

additional reporting requirements.

\22\17 CFR Parts 15 to 18.

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Financing transactions are proposed to be included in a reportable

position because of the important influence they have on the available

supply of a Treasury security. The legislative history behind the large

position reporting authority supports the inclusion of financings,

especially repurchase agreements.23 The approach for including

financing transactions is addressed below in the definition of a gross

financing position. The gross financing position is the second

component of a reportable position.

\23\See supra note 15 at pg. 44.

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Finally, the Department believes that a third component--

``fails''--should be included in the definition of reportable position.

An investor's net fails position (fails to receive less fails to

deliver) indicates ownership rights to a security without the cost of

financing. All fail positions should be included without

differentiating between types of counterparties (i.e., broker-dealers,

customers). A large ``fail-to-receive'' position may exacerbate, or

benefit from, a squeeze by maintaining high demand for a specific

security. In analyzing existing market discontinuities, the knowledge

of the existence of any large net fail-to-receive positions could help

determine the cause and potential resolution of a tight supply

condition.

Commenters are also requested to address the treatment of fails.

Specifically, the Department is interested in receiving comments on

whether the proposed treatment of fails positions is more appropriate

than excluding fails from the determination of a large position and

instead requiring submitters of large position reports to disclose

information about fails as a memorandum entry. Since a position that

remains unsettled after its scheduled settlement date is not included

in the computation of a net trading position, including fails may act

to artificially increase the size of the reported position. This result

is apparent if fails-to-deliver were to be a positive addition to a

reportable position since a past settlement date short trade, unlike a

short forward position, would not reduce the size of an entity's

reportable position. Additionally, commenters are asked to consider

whether fails should be treated differently from forwards given their

similarities.

The sum of the net trading position, gross financing position and

the net fails position is a reporting entity's total reportable

position.

``Gross Financing Position''--To achieve the statutory intent,

financing transactions should be included in a reportable position. The

more difficult question is how to include them. Within the generic

construct of financing transactions, there are multiple types of

transactions including: repurchase and reverse repurchase agreements,

securities borrowed and loaned, securities pledged and received in

pledge, and any other form of credit collateralized by Treasury

securities.

Since the intent of large position reporting is to obtain

information about the control of Treasury security positions, an

effective approach for incorporating financing transactions is to

include them on a gross basis (no netting) in the reportable position

of the entity that has received the securities. Under this approach,

the seller/lender of the securities would not include the financing

transaction in its calculation of the gross financing position since it

would already have reflected the positions that provided it with

control of the securities (i.e., cash positions, reverse repos) in the

calculation. Reporting in this manner would provide regulators with

information about the broader universe of market participants that had

possible control of the Treasury security, regardless of how they might

have subsequently financed or transferred it.

No differentiation is made in the computation between the types of

financing transactions (e.g., repos, securities lending) since, despite

different legal frameworks, they are generally equally effective ways

of obtaining control. The first part of the gross financing position

computation also does not differentiate between types of repos (e.g.,

overnight, term). As an example, a security that has been received

through a reverse repo and contemporaneously repoed out to a third

party will be included at the gross par amount of the reverse in the

entity's long position. Gross reporting yields this result even though

the security was no longer in the possession of the reporting entity

since it had been contemporaneously repoed out. The proposed approach

will result in the potential for multiple entities including a position

for the same specific Treasury security in their respective

computations and reportable positions. However, the resultant double

counting is not considered to be a problem because it provides

additional information about entities that have various legal claims to

the security and that may potentially benefit from any possible market

disruptions.

An optional exclusion is proposed that will permit a reporting

entity to voluntarily exclude from the computation of its gross

financing position certain securities received through financing

transactions. This exclusion would apply to situations in which the

securities received were subject to a right of substitution on behalf

of the delivering counterparty, tri-party custodial relationships, or

custody of the securities being retained by the party granting the

legal interest in the securities (hold-in-custody). These Treasury

securities would be eligible for exclusion based on a presumption that

the receiving organization did not have effective control of the

securities despite having ``received'' them. The exclusion is optional

because its use, while benefiting the entity taking advantage of it,

does not diminish the usefulness of the resultant large position

reports. If it were made mandatory, many potential reporting entities

might find it too costly and burdensome to differentiate information on

financings at this level of detail. If the amount excluded is large

enough to cause the reporting entity to fall below the reporting

threshold, then a report should not be filed.

The gross financing position is then combined with the other two

components of a reportable position to determine the total reportable

position held by a reporting entity. For purposes of the calculation,

all positions would be valued at the par amount of the securities

involved.

``Large Position Threshold''--The large position threshold is the

dollar amount of a reportable position at or above which the

requirement to file a large position report is triggered. Since

[[Page 65220]]

the large position rules take an ``on-demand'' approach to reporting,

the specific large position threshold for any given Treasury security

issue may vary. However, since the threshold would not be known in

advance, we believe that it will be beneficial to provide some

certainty to market participants by setting a minimum dollar amount

(``floor'')--$2 billion--below which reports would not be requested.

Establishing a floor should minimize compliance costs. For example,

many entities, based on this level of the floor, may decide that no

modifications would be needed to their computer systems or trading

strategies since the rule would not apply to them (i.e., the firms

would not expect their positions ever to reach the floor amount). Of

the six commenters who addressed this issue, three endorsed a variable

threshold method (one respondent actually supported a fixed percentage

method, which would lead to a variable dollar level since it would be

based on the amount issued of a specific security).

``Recently-Issued''--Despite the determination that any large

position reporting would be done on an on-demand basis, the Department

believes that it is useful to set out a general description of which

Treasury securities would be within the scope of the rule. For

convenience, the definition of recently-issued includes when-issued

securities from the time of announcement of the issue. Thus, when-

issued securities would be considered the most recent issue of a

security type. In response to the commenters and in consideration of

the Treasury securities that could be of most interest to regulators,

we have proposed that as a regular matter, recently-issued would be

limited to the three most recent issues of a Treasury security (bill,

note or bond) if issued quarterly or more frequently and the two most

recent issues if issued less frequently. Currently, this latter

condition exists only for the 30-year bond. The definition of recently-

issued for this security, which is currently issued semi-annually, was

limited to the two most recent issues because a three-most-recent

definition would have, on a regular basis, encompassed a time period of

nearly a year and a half. As discussed earlier, the Department intends

to reserve the right to broaden the scope of this definition, on a

limited exception basis, consistent with the purposes of the GSAA.

3. Section 420.3

Reporting. The provisions of this section require large position

reports to be filed by the designated filing entity of any reporting

entity that has a reportable position that equals or exceeds the large

position threshold in a particular Treasury security issue as specified

by the Department. This section also specifies the method by which

Treasury will provide notice to the marketplace requesting large

position reports, the specific information that must be provided on the

large position reports, where they must be filed and the time frame for

their submission. This section also permits either the Treasury or the

FRBNY, acting as the Treasury's agent, to request additional

information from a reporting entity if either organization, after

analyzing the large position reports, requires further data to gain a

more complete understanding of the extent and nature of the

concentration of positions in a particular Treasury security. A sample

reporting format for large position information is illustrated in

Appendix B to the rule.

Analysis of Alternative Reporting Methods

The method of reporting large positions is a central issue in the

development of large position rules, since the method selected will

significantly affect the compliance burdens of, and costs incurred by,

the entities subject to the large position regulations.

The Department evaluated two distinct approaches for reporting

large position information: an ``automatic'' or regular reporting

method and an ``on-demand'' reporting method. Under an automatic,

regular reporting process, large position reports would be required to

be filed whenever a reporting entity equalled or exceeded the large

position threshold stated in the rules for any covered Treasury

security. Depending upon the particular method used in a regular

reporting system, reports could either be required on a one-time basis

or they could continue to be required each day the entity exceeded the

large position threshold and would cease only when its positions in the

Treasury security fell below the threshold level. In contrast, in an

on-demand reporting system, reports would be triggered by a notice from

the Treasury requesting large position information on a specific issue

of a Treasury security from those reporting entities whose positions at

that time equalled or exceeded the large position threshold specified

in the notice.

In evaluating the method of reporting that should be employed, the

Department took into consideration the events that gave rise to

Congress' grant of authority to prescribe large position reporting

rules as well as the purposes and objectives of the statutory authority

underlying such rules. The main focus of our analysis involved

selecting the approach that best balanced the purposes of the statute

and any new regulatory burdens that would be created. (Readers are

referred to the ANPR for a more detailed discussion of these issues and

other background information pertaining to large position

reporting.)24

\24\See supra note 5.

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The primary purpose of any large position reporting system is to

enable the Treasury and the other regulators to understand better the

possible reasons for apparent significant price distortions and the

causes of market shortages in certain Treasury securities. Large

position reports are also intended to provide regulators with

information on concentrations of control for market surveillance

purposes and for enforcement of the securities laws, as well as to

enable Treasury policy makers to make better decisions concerning any

possible government actions that might be taken in response to apparent

price anomalies. A critical factor in evaluating the two alternative

large position reporting methods was the extent to which they would

meet the overriding legislative and policy objective of strengthening

the ability of the regulatory agencies to deter possible manipulation

of the Treasury securities market.

On-Demand Reporting System

The requirements outlined in paragraph 420.3(a) reflect the

Department's decision to propose an on-demand reporting system for

large position information. Reports would be required in response to a

specific request, issued by the Treasury, for large position

information.

An on-demand reporting approach will enable the Department to

target large position reporting to a specific issue of a Treasury

security in response to particular circumstances or unusual market

activity. This would ensure the availability of information for market

surveillance and enforcement purposes in those specific instances where

it is most needed, thus satisfying the primary objective of this

regulatory authority, while obviating the need to collect information

on securities that are not of interest. In contrast, under a regular

reporting system, reports would be required when the large position

threshold had been exceeded; therefore, reports would be filed even in

situations where there were no price distortions, anomalies or evidence

of possible

[[Page 65221]]

market manipulation. This would result in unnecessary costs for, and

burdens on, both market participants and the government. In addition, a

regular reporting method could increase the possibility that investors

would take deliberate actions to reduce their holdings of Treasury

securities to avoid exceeding the ``large'' position reporting

threshold. This could result in decreased market participation, reduced

liquidity and increased borrowing costs.

An on-demand reporting system would avoid the need to set a uniform

large position threshold that would apply to some or all Treasury

issues as would be required under an automatic reporting approach. The

Treasury would have the flexibility and latitude to establish a tailor-

made large position threshold each time it requests large position

reports. This permits a large position threshold to be based on the

latest supply of, and market conditions for, a specific Treasury

security, which can vary considerably.

On-demand reporting should be less onerous and costly for market

participants. Any modifications to existing computer systems to

compile, summarize, compare and report the positions would be less

complex than for the required continual review of multiple securities

positions under a regular reporting method. Under a regular reporting

approach, firms would need to modify existing computer systems or

develop entirely new systems to continuously collect, monitor and

report positions in when-issued and recently-issued Treasury

securities. Since reports would need to be filed whenever positions

equalled or exceeded the large position threshold, the systems would

have to be designed to compute the overall positions in a large number

of separate Treasury security issues (approximately 23 separate

CUSIPs25 based on the definition of recently-issued in paragraph

420.2(g)) and then compare the amount of the positions to the large

position threshold on a daily basis to determine if reports would have

to be produced. There would be an even greater burden on those entities

that would manually compile this information.

\25\The CUSIP number is the unique identifying number assigned

to each separate security issue and each separate STRIPS component.

---------------------------------------------------------------------------

Recognition of the costs that would be imposed on market

participants has been a critical consideration in our attempt to

develop large position rules that strike a balance between regulatory

oversight and market efficiency. We believe that an on-demand reporting

system significantly minimizes the regulatory costs and burdens on

market participants compared to those that would be incurred if the

Treasury were to require regular reporting.

In analyzing the different reporting models, the Treasury also took

into consideration the fact that a large segment of market participants

who are likely to be subject to Treasury's large position reporting

rules--the 37 primary dealers--already submit regular position reports

to the FRBNY on a voluntary basis for on-the-run Treasury notes and

bonds. By adopting an on-demand reporting system, we have attempted to

minimize, as much as possible, any duplicate reporting by these

entities.

Triggering Event: Treasury Request for Information

The provisions of paragraph 420.3(a) propose that the requirement

to report large position information would be triggered by a notice

issued by the Treasury specifically requesting such information. The

notice would identify the specific Treasury security issue to be

reported, the applicable large position threshold (in no case less than

$2 billion) for that issue and the date or dates26 as of which the

large position information must be reported.

\26\To understand the price and supply dynamics of the security

under scrutiny better, the Treasury reserves the right to request

that entities submit positions covering a multi-day, historical time

frame rather than just one day.

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The notice requesting large position reports would be communicated

by issuing a press release and subsequently publishing the notice in

the Federal Register. Given the relatively short reporting deadline in

the proposed rules, this two-pronged notice approach satisfies the dual

objectives of operational efficiency and legal sufficiency. A Treasury

press release has the advantage of achieving wide, timely distribution

of the notice without a significant time lag. Although this approach

relies on third-party services over which the Treasury has no control,

it is reasonable to expect that the major news and financial

publications and the various electronic financial wire services (e.g.,

Telerate, Reuters, Bloomberg, Knight-Ridder) would disseminate the

Treasury notice as quickly as their respective technological

capabilities allow. The electronic financial wire services and news

publications can also be relied upon to accurately present the

Treasury's request for large position information. We believe that any

market participant, including a foreign entity, that may control a

large position in a Treasury security is likely to subscribe, or have

access, to one or more of the electronic financial wire services. Thus,

the likelihood that the Treasury notice requesting large position

reports would fail to come to the attention of a potential reporting

entity is extremely remote.

The press release would include information about how to obtain a

sample large position report and the name and telephone number of a

Departmental contact person to answer questions about the report.

Since the Federal Register is the designated federal publication

for providing official notice, publishing the Treasury notice in that

document is legally sufficient for ``constructive notice'' of the

request despite lagging the issuance of the press release.

Designated Filing Entity

Under paragraph 420.3(b), the designated filing entity is

responsible for preparing and submitting the large position reports on

behalf of a reporting entity in response to a Treasury notice

requesting large position information. The identity of the designated

filing entity must be given on any large position report submitted.

Each reporting entity, as defined in paragraph 420.2(i), whose

reportable position equals or exceeds the large position threshold,

must have one, and only one, designated filing entity. A reporting

entity that consists of only one component is the designated filing

entity. For those reporting entities that consist of multiple

affiliates or aggregating entities, one entity must be selected to be

the designated filing entity. That entity is responsible for receiving

and compiling the large position information from each of the

aggregating entities, computing the reportable position and preparing

and filing the large position report.

An official authorized to file reports on behalf of the designated

filing entity shall sign the large position report and certification

attesting to the accuracy, completeness and reliability of the

information being reported. This official must be one of the following:

the chief financial officer, the chief operating officer, the chief

executive officer, or the managing partner or equivalent of the

designated filing entity. The contact person named on the large

position report should also be a representative of the designated

filing entity but need not be the authorized official.

Further, any designated filing entity is required, under the

applicable provision in section 420.4, to make and maintain

[[Page 65222]]

additional records on behalf of the entire reporting entity.27

\27\ Since designated filing entities are also aggregating

entities, they would also be required under Secs. 420.4(b) or (c) to

maintain records pertaining solely to their own securities

transactions.

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Information Required on Large Position Reports

Paragraph 420.3(c), together with Appendix B, sets forth the

specific information that must be provided in the large position

report. For those reporting entities that have a number of aggregating

entities or affiliates, the amount to be reported for each of the

positions is the total, combined net amount. All positions are to be

reported as of the close of the business/transaction day for the date

specified. In those instances where Treasury requests positions

covering multiple dates, separate reportable position calculations must

be submitted for each date. The rule does not require, nor does the

Treasury intend, for firms to calculate their positions as of some

specific point during the trading day. However, in order to meet the

deadline for reporting, the designated filing entity may need to

determine a cut-off time for foreign entities.

The following administrative information must be provided on the

large position report:

(a) The name of the reporting entity;

(b) The address of the principal place of business of the reporting

entity;

(c) The name and address of the designated filing entity;

(d) The description of the Treasury security being reported,

including the CUSIP number;

(e) The date or dates for which the information is being reported

(which should be the same date(s) as that (those) stated in the

Treasury notice requesting the large position reports);

(f) The date the report was submitted;

(g) The name and telephone number of a contact person of the

designated filing entity to whom questions can be directed regarding

any information on the report;

(h) The name and title of the person authorized to submit the

report (as previously described);

(i) A certification statement attesting to the accuracy,

completeness and reliability of the information being submitted; and

(j) The signature of the authorized official specified in (h).

The following large position information must be reported in the

exact order as noted:

(a) Line 1, cash/immediate net settled positions;

(b) Line 2, net when-issued positions for to-be-issued and reopened

issues;

(c) Line 3, net forward settling positions, including next-day

settling positions;

(d) Line 4, net positions in futures contracts that require

delivery of the specific security that is the subject of the large

position report (but not futures contracts for which the security that

is the subject of the large position report is one of several

securities that may be delivered and not futures contracts that are

cash-settled);

(e) Line 5, net holdings of STRIPS principal components of the

specific security that is the subject of the large position report;

(f) Line 6, the gross financing position, which is the sum of the

gross par amounts of a security issue received from financing

transactions (e.g., reverse repurchase transactions, bonds borrowed,

securities received in pledge and collateralized credit extended);

(g) Line 7, net fails position, which is fails to receive less

fails to deliver in the specific security issue; and

(h) Line 8, Total Reportable Position, which is the sum of lines 1-

7.

All amounts must be reported in millions at par value. See Appendix

B for a sample reporting format.

The large position report provides for two memoranda entries.

Memorandum Entry #1 is the sum of the gross par amounts of a security

issue delivered as part of a financing transaction (e.g., repurchase

agreements, securities loaned, securities pledged and collateralized

loans). This amount should not be included in the gross financing

position (line 6) as noted in item (f) above. Memorandum Entry #1 is

required.

Memorandum Entry #2 is to be reported by those entities that take

the voluntary exclusion pursuant to paragraph 420.2(c) to reduce the

gross financing position reported on line 6. The amount shown is the

amount of securities received from financing positions over which the

reporting entity does not have effective control due to arrangements

such as third-party custodial structures, hold-in-custody relationships

or substitution rights. This amount should not be included in the

amount reported on line 6.

Lines 1-5 of the large position report are consistent with the

items that determine the net long position for auction reporting

purposes.28 As with the auction rules, the amounts to be reported

for each of the items on lines 1-5 are the net of any long and short

positions, so that the entry can be a positive number (long position),

a negative number (short position), which should be shown in

parentheses, or zero (flat position). Only securities trades that have

actually settled should be included in line 1, cash/immediate net

settled positions. Accordingly, auction purchases that have not yet

been settled or issued should be included in the total reported on line

2, when-issued positions.

\28\See supra note 14.

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For line 6, Gross Financing Position, netting of these positions is

not permitted although certain items may be excluded. (See paragraph

420.2(c).) For reporting entities that take advantage of this limited

exclusion, the gross financing position should not include the amount

of security issues received from financing positions over which the

reporting entity does not exercise control. Rather, the amount

associated with the exclusion should be reported in the Memorandum

Entry #2.

Line 7, Net Fails Position, can only be reported as a positive

number (which indicates fails to receive exceed fails to deliver) or

zero (which reflects fails to receive are totally offset by, or are

less than, fails to deliver).

Reporting Format

Rather than designing and mandating a specific reporting form, the

Treasury is proposing to allow the reporting entities to develop their

own large position reports, provided the reports contain all of the

required information as prescribed in the rules, in the order stated in

Appendix B. By permitting the reporting entities to design their own

large position report, firms will be able to integrate the report into

their existing systems as they see fit and avoid the unnecessary burden

of transferring the information from internally generated reports to a

Treasury-mandated form. While firms will have a certain amount of

latitude and discretion in designing a large position report, the

information on the various positions that constitute the total

reportable position must be reported in the order shown in paragraph

420.3(c) and in the sample/prototype report in Appendix B. This will

facilitate analysis of the data. Failure to include any of the required

information, including administrative information, on the large

position report will constitute non-compliance with the rule.

Filing of Large Position Reports: Where, When and How

Pursuant to paragraph 420.3(d) the large position report must be

submitted to the FRBNY. The report must be received before 12:00 noon,

Eastern time, on the second business day after

[[Page 65223]]

the issuance of the Treasury press release requesting large position

reports. Given that large position reports would generally be requested

by the Department in response to certain market conditions or activity,

the proposed rule has a fairly short response time for submission of

the reports. The one and one-half day reporting deadline balances the

need for timely information with the recognition that some time is

required to compile the information. The reporting time frame should

not present significant problems since the information would be derived

from records required to be maintained by the reporting entities.

Additionally, we understand that most large firms engaged in the

securities business compile their positions on a daily basis. Finally,

since reporting is ``on-demand,'' the filing of a large position report

will be an exceptional event not requiring regular preparation.

The Treasury requests comments from market participants on the

proposed reporting time frame, specifically concerning any potential

obstacles, burdens or other factors that would make meeting the

deadline problematic, and the extent of any extra costs that would be

incurred.

The rule, in paragraph 420.3(d), also provides that the large

position report may be filed in any manner or media (i.e., hard copy,

facsimile or other electronic transmission) that is acceptable to the

FRBNY. As mentioned earlier, the reporting entities are permitted to

produce or generate their own large position reports.

Follow-Up Inquiries

The requirement to file a large position report in response to a

specific Treasury notice requesting this information is expected to be

an occasional event. The requirement is satisfied upon receipt of the

report by the FRBNY within the required time frame and in the required

format as prescribed in paragraph 420.3. The proposed rule does not

impose a continuous reporting requirement. However, the Treasury and

the FRBNY staff may contact a designated filing entity after receiving

a large position report to discuss any aspect of the report, seek

clarification of the information provided or request additional

documents or information. The purpose of such inquiries or requests for

data would be to understand the concentration of positions better. The

Treasury or the FRBNY staff may also request further detail on any

position reported, such as breaking out the gross financing position

into its component parts or identifying repurchase agreements by their

terms or types (e.g., overnight repos, term repos, tri-party repos,

hold-in-custody repos). Reporting entities are required to make good

faith attempts to respond to inquiries and provide any additional data

requested in an expeditious manner.

Testing of Large Position Reporting Systems

The Department wishes to underscore the importance of accurate,

reliable and timely reporting of large position information by affected

market participants. As the agency of the Federal government most

concerned with minimizing the interest cost on the public debt, the

Treasury believes that the United States is best served by a liquid and

efficient market for Treasury securities that is not overburdened with

regulation, but, at the same time, is not viewed as being subject to

manipulation. In developing these proposed rules, the Treasury has

attempted to pursue a modest approach that balances the need for

additional regulation with a desire to minimize the burdens on, and

costs to, the industry and to preserve the efficiency of the Treasury

securities market.

Compliance with these large position rules--the maintenance of

reliable records and the accurate and timely reporting of large

position information--is essential to preserving and strengthening the

integrity of the Treasury securities market. One of the primary

concerns with an on-demand reporting system is the increased potential

for inaccurate or incomplete information on large positions due to

unfamiliarity by market participants with the reporting requirements.

Large position information will be extremely important for policymakers

at Treasury, in consultation with other regulatory officials, in

determining whether, and what course of, action should be taken to

alleviate a concentration of control in a particular Treasury security.

Thus, it is imperative that market participants fully understand and

comply with the large position recordkeeping and reporting

requirements.

To ensure that market participants remain knowledgeable about the

rules, specifically how to calculate and report a reportable position,

the Treasury intends to ``test'' the reporting system by requesting

large position reports at least annually, regardless of market

conditions for a particular security. The Treasury does not intend to

notify market participants that its request for large position reports

is merely a test. Commenters are asked to address this proposed

treatment of ``test'' reporting. The notice and reporting requirements

are proposed to be identical to a call for large position information

in which the Department is concerned about price anomalies and

concentrated ownership. ``Test'' reporting is consistent with the

statutory purpose since the Department believes it is both necessary

and appropriate to help ensure that an on-demand program of large

position reporting is conducted effectively.

4. Section 420.4

Recordkeeping. Section 15C(f)(2) of the Securities Exchange Act of

1934 authorizes the Secretary to promulgate rules requiring large

position holders to make and preserve records related to large position

reporting requirements. Section 420.4 sets forth the proposed

recordkeeping rules supporting large position reporting under that

authority. The proposed recordkeeping rules are divided into two

classes: (1) records required for entities that are currently subject

to recordkeeping rules of federal securities or federal bank regulators

(paragraph 420.4(b)); and (2) records required for all other entities,

such as hedge funds, insurance companies, and pension funds (paragraph

420.4(c)).

Under paragraph 420.4(a)(1), the recordkeeping rules would apply to

all aggregating entities that may control components of their

respective reporting entity's reportable position as of the effective

date of the final large position rules, but only if the aggregating

entities' respective reporting entity had a reportable position in any

Treasury security equal to or in excess of $2 billion (the minimum

large position threshold) at any time during the prior two-year period

ending 90 days after publication of the final rule. Thus, all reporting

entities (through their respective aggregating entities) will be

responsible for determining whether they have controlled a reportable

position of at least $2 billion in a Treasury security during the two-

year period. For some firms, this will necessitate a thorough review of

their records to determine if their reportable positions reached that

level.

In addition, under paragraph 420.4(a)(2), in instances where a

reporting entity controlled a reportable position of at least $2

billion in a Treasury security during the two-year period, its

designated filing entity will be required to submit a letter to the

FRBNY certifying that it has in place, or will have in place by the

effective date of the final rules, a recordkeeping system (including

policies and procedures) capable of making, verifying the accuracy of,

and preserving the requisite records. This

[[Page 65224]]

letter must be signed by one of the following officials of the

designated filing entity: the chief financial officer, the chief

operating officer, the chief executive officer, or the managing partner

or equivalent. The letter must be received by the FRBNY within 120 days

after publication of the final rule.

The Department believes this requirement would ensure that entities

having a history of controlling large Treasury securities positions

would have supporting records in place in the event their reportable

positions reach an announced large position threshold for a specific

issue, thereby triggering the submission of a large position report.

These potential large position holders would have several months to

develop methods to meet the proposed recordkeeping requirements since

there will be a delayed effective date for the rules. Subsequent to the

effective date of the rules, aggregating entities within a reporting

entity that had not previously had a reportable position in a Treasury

security equal to or greater than $2 billion but whose reportable

position reaches or exceeds $2 billion would be subject to the large

position recordkeeping requirements from that point forward.

Regardless of the date aggregating entities become subject to the

recordkeeping rules, their being subject to the rules is based on

whether the reportable position of their reporting entity reaches the

large position threshold, not on whether the position of the

aggregating entity itself reaches that threshold. Thus, an aggregating

entity may be subject to the recordkeeping rules even though its own

position has been substantially below the threshold.

Entities Subject to Recordkeeping Rules of Federal Securities or

Federal Bank Regulators (Paragraph 420.4(b))

In developing the proposed recordkeeping rules, the Department

sought to strike an appropriate balance between ensuring that large

position holders maintain records that document and facilitate the

generation of accurate reports and minimizing recordkeeping burdens on

large position holders. Accordingly, the Department examined existing

securities-related recordkeeping rules of the SEC, the Treasury, and

the bank regulatory agencies to determine if the records required under

those rules include the type of information necessary to create large

position reports.

Specifically, the Department examined the following recordkeeping

regulations: SEC recordkeeping regulations applicable to registered

broker-dealers, registered investment advisors, and registered

investment companies; Treasury recordkeeping rules applicable to

registered government securities broker-dealers, financial institutions

that have filed or should file notice as government securities broker-

dealers, and depository institutions that hold government securities as

custodians; and bank regulatory agency recordkeeping rules applicable

to banks that conduct securities transactions for customers.29

\29\17 CFR 240.17a-3, 240.17a-4, and 240.17a-7 (for registered

brokers and dealers); 17 CFR 275.204-2 (for registered investment

advisers); 17 CFR 270.31a-1, 270.31a-2, and 270.31a-3 (for

registered investment companies); 17 CFR 404.2 and 404.3 (for

registered government securities brokers and dealers); 17 CFR 404.4

(for noticed financial institutions); 17 CFR 450 (for depository

institution custodians that exercise investment discretion); and 12

CFR Part 12, Part 208, or Part 344 (for banks conducting securities

transactions for customers), respectively.

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The Department has determined that all of these recordkeeping rules

require the affected entities to make and keep records of original

entry (i.e., journals, blotters, or similar records) containing

itemized records of all of the entities' securities transactions,

including information pertaining to the amount and identification of

each security or instrument. Records of original entry are basic,

detailed records that cover, among other things, all transactions

related to the components of a reportable position. Most of the

existing regulations of the federal securities and federal bank

regulators also require the affected entities to maintain order tickets

or memos and various ledgers containing much of the same information

required in the records of original entry.30

\30\Most of the existing recordkeeping rules also require

affected entities to maintain position records, which provide a

composite listing of the long and short positions in each security

for which the broker-dealer or other entity is responsible. However,

position records do not include information on positions resulting

from certain unsettled and off-balance sheet transactions (e.g.,

when-issued trades and futures).

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The proposed treatment of depository institutions that exercise

investment discretion warrants specific discussion with respect to

recordkeeping requirements because such entities are potential

reporting entities. Depository institutions that exercise investment

discretion are generally subject to the securities recordkeeping

requirements of the bank regulatory agencies (12 CFR 12, 12 CFR 208, or

12 CFR 344), regardless of whether or not they exercise investment

discretion within their trust departments.

In addition, for those rare cases in which depository institutions

exercise investment discretion and act as custodians of government

securities outside of their trust departments, the recordkeeping

provisions of paragraph 450.4(c) of the GSA regulations also

apply.31 The Department views the information required by the

recordkeeping rules of paragraph 450.4(c) as comparable to the basic

information required in the records of original entry under the

existing rules of the SEC, the Treasury, and the bank regulatory

agencies.

\31\Recordkeeping requirements for depository institutions

acting solely as custodians were not considered because these

entities do not meet the proposed definition of having control under

paragraph 420.2(b).

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The Department believes that reportable positions can be

constructed relatively easily from the aforementioned records required

by the federal regulatory agencies. As a result, the Department has

decided, with respect to large position rules, not to propose any new

recordkeeping rules for aggregating entities that are: (1) subject to

the existing federal recordkeeping requirements, and (2) not designated

filing entities.

However, an aggregating entity that is also a designated filing

entity would be required to maintain specific large position-related

records in addition to its existing securities-related records. (Each

reporting entity would have only one designated filing entity.) First,

the designated filing entity would be required to make and maintain

copies of all of the large position reports it filed. Also, since the

designated filing entity, in some cases, would have to collect and

combine information received from other aggregating entities within its

reporting entity, the designated filing entity would be required to

make and maintain supporting documents or schedules (e.g., worksheets)

that are used to compute the reportable position and to prepare large

position reports. The designated filing entity would also be required

to make and keep a chart showing the organizational entities (e.g.,

aggregating entities, if applicable) whose data is combined for

purposes of calculating a reportable position.

The Department believes that requiring supporting schedules would

enhance the ability of the designated filing entity to produce accurate

and timely large position reports. Moreover, the retention of

supporting schedules and organizational charts would be indispensable

in responding to follow-up inquiries from the regulatory agencies and

in the course of any in-depth review or reconstruction of a reporting

entity's reportable position conducted by the Treasury, the FRBNY, or

the SEC.

[[Page 65225]]

Designated filing entities would be required to retain the

additional records for the same period specified in their existing

securities-related recordkeeping rules.32 In instances where

recordkeeping rules contain more than one retention period (e.g., SEC

Rule 17a-4), paragraph 420.4(b)(4) of the proposed rule specifies that

the longest retention period will apply.

\32\See supra note 29.

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Other Entities (Paragraph 420.4(c))

Certain entities that have the potential to control large

positions, or portions thereof, in Treasury securities within a

reporting entity (e.g., hedge funds and insurance companies) are not

currently subject to federal requirements to make and preserve

securities-related records. To ensure that such entities make and

preserve records that document and facilitate the generation of

accurate large position reports--while minimizing the burden on these

entities--the Department proposes that all aggregating entities (within

their respective reporting entities) in this category make and maintain

records of original entry (the equivalent of blotters or journals).

These documents should be relatively easy for large, sophisticated

investors to implement. In fact, it is our understanding that most such

investors already produce and maintain such records as part of their

on-going business and accounting control systems.

Like the recordkeeping system applicable to entities that are

subject to federal securities-related recordkeeping rules, an

aggregating entity that is also a designated filing entity would be

required to make and maintain the following large position-related

records in addition to its records of original entry: copies of all of

the large position reports it filed, supporting documents or schedules

(e.g., worksheets) used to prepare large position reports, and a chart

showing the organizational entities (e.g., aggregating entities, if

applicable) whose data is aggregated in order to calculate a reportable

position. Such records would have to be preserved by the designated

filing entity for at least six years, the first two in an easily

accessible place.

5. Section 420.5

Effective Date. Section 420.5 sets out the effective date for both

the recordkeeping and reporting provisions of the large position rules.

The rule provides for a delayed effective date approximately six months

after publication of the final rule. This period of time is provided in

order to give affected entities sufficient time to make the necessary

preparations for compliance. Only subsection 420.4(a) is not subject to

this date but instead contains its own specific dates for compliance.

IV. Special Analysis

The proposed rules reflect the Treasury's interest in meeting

regulators' informational needs while minimizing the costs and burdens

on market participants. The rules propose to adopt an on-demand

reporting system, which will significantly minimize operational and

compliance costs for market participants compared with the costs that

would have been incurred if a regular reporting system were required.

Further, in an effort to avoid imposing new requirements, the proposed

regulations adopt, for the most part, existing federal recordkeeping

requirements for the largest segment of market participants that would

be subject to the rules. The proposal requires limited records to be

maintained by those entities that are not currently subject to federal

rules to make and preserve securities-related records. Additionally,

the establishment of a minimum floor of $2 billion for the large

position threshold will also greatly reduce the number of market

participants potentially subject to the proposed rules. Therefore,

based on the very limited impact of the proposal, it is the

Department's view that the proposed regulations are not a ``significant

regulatory action'' for the purposes of Executive Order 12866.

In addition, pursuant to the Regulatory Flexibility Act,\33\ it is

hereby certified that the proposed regulations, if adopted, will not

have a significant economic impact on a substantial number of small

entities since the proposal establishes a minimum large position

threshold of $2 billion. This assures market participants that the

Treasury would not request large position reports for positions below

that minimum amount. The Department does not believe that small

entities will control positions of $2 billion or greater in any

Treasury security. Accordingly, the inapplicability of the proposed

regulations to small firms indicates that there is no significant

impact. As a result, a regulatory flexibility analysis is not required.

\33\5 U.S.C. 601, et seq.

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The Paperwork Reduction Act of 1995 requires that collections of

information prescribed in the proposed rules be submitted to the Office

of Management and Budget for review and approval.\34\ In accordance

with this requirement, the Department has submitted the collection of

information contained in this notice of proposed rulemaking for review.

Under the Act, an agency may not conduct or sponsor, and a person is

not required to respond to, a collection of information unless it

displays a valid OMB control number. Comments on the collection of

information may be submitted to the Office of Information and

Regulatory Affairs, Office of Management and Budget, Attention: Desk

Officer for Department of the Treasury, Washington, D.C. 20503; and to

the Government Securities Regulations Staff, Bureau of the Public Debt,

at the address specified at the beginning of this document.

\34\44 U.S.C. 3507(d).

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The collection of information in this proposed regulation is

contained in proposed Secs. 420.3 and 420.4. The proposed reporting

requirements in Sec. 420.3 would require the designated filing entity

of any market participant, whose position equals or exceeds the

announced large position threshold for a specific issue of a Treasury

security, to report information to FRBNY. Although the Treasury cannot

be certain of the number of market participants that would have large

reportable positions for a specific issue on which information is

requested, we believe that very few entities would likely have to file

reports because the proposed minimum reporting threshold is $2 billion.

Further, Treasury expects that its requests for information will be

relatively infrequent, and estimates that there will only be an average

of five reports filed in response to any particular request.

The proposed recordkeeping requirements in Sec. 420.4 require any

aggregating entity to make and preserve certain records as of the

effective date, but only if it has, during a specified period,

controlled a portion of its reporting entity's reportable position in

any Treasury security when that reportable position is equal to or in

excess of the $2 billion minimum large position threshold specified in

Sec. 420.2(d). For each reporting entity subject to the recordkeeping

rules as of the effective date, the designated filing entity will be

required to submit a letter, on a one-time basis, certifying that it

has in place, or will have in place, a recordkeeping system capable of

making, verifying the accuracy of, and preserving the requisite

records. As mentioned above, while Treasury expects that very few

entities would likely control positions in excess of the stated

threshold that would require reporting, a larger group of entities will

[[Page 65226]]

be required to submit the one-time letter.

For aggregating entities currently subject to, and in compliance

with, recordkeeping rules of federal securities or federal bank

regulators, and subject to the large position recordkeeping rules,

there are no additional recordkeeping requirements, with one exception.

If the aggregating entity is the designated filing entity for its

reporting entity, then it is required to make and maintain copies of

any large position reports filed; supporting documents or schedules

used to compute data for such large position reports, including any

information received from aggregating entities within the reporting

entity; and an organizational chart showing the entities that are

aggregated in developing a reportable position.

Those aggregating entities that must comply with the proposed rules

but are not subject to paragraph 420.4(b) must make and preserve

journals, blotters or other records of original entry containing an

itemized record of all transactions that fall within the definition of

a reportable position. This provision accounts for the greatest

percentage of estimated recordkeeping burden hours. However, this

requirement is significantly less than the full range of books and

records requirements currently applicable to entities subject to

federal securities-related recordkeeping requirements. If the

aggregating entity is also a designated filing entity, the requirements

for a designated filing entity are also applicable.

The collection of information is intended to enable the Treasury

and other regulators to understand better the possible reasons for any

apparent significant price distortions and the possible causes of

market shortages in certain Treasury securities. The collection of

information will help ensure that the Treasury securities market

remains liquid and efficient, and is not viewed as subject to

manipulation. The proposed rules apply to all market participants

controlling large positions, as defined in the rules. Per paragraph

420.3(c), it is a mandatory requirement that reporting entities with

reportable positions that equal or exceed the specified threshold in a

Treasury notice respond through their designated filing entities by

filing a report in the required format and within the specified

reporting time frame.

In developing the proposed rules, we have consulted with affected

entities and regulatory agencies, and expect that this process will

continue through the development of a final rule. As previously

mentioned, Treasury published an ANPR\35\ which requested comments on a

number of specific issues, including the approach and structure for a

large position recordkeeping and reporting system. The estimated

reporting and recordkeeping burden hours are based on a review of

tenders submitted in Treasury auctions, position reports that primary

dealers already complete and voluntarily submit to FRBNY, recordkeeping

requirements that are already in place for federally-regulated

participants in the government securities market and discussions with

the industry and other regulators.

\35\See supra note 5.

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Treasury invites further comments on: (1) Whether the proposed

collection of information is necessary for the proper performance of

functions of the Treasury, including the practical utility of the

information; (2) the accuracy of the Treasury's estimate of the burden;

(3) enhancement of the quality, utility, and clarity of information to

be collected; and (4) minimizing the burden of the collection of

information on respondents, including through the use of automated

collection techniques or other forms of information technology.

Estimated total annual reporting and recordkeeping burden: 4,940

hours.

Estimated annual number of recordkeepers: 100.

Estimated annual number of respondents: 10.

Estimated annual frequency of response: On occasion.

List of Subjects

17 CFR Part 400

Administrative practice and procedure, Banks, banking, Brokers,

Government securities, Reporting and recordkeeping requirements.

17 CFR Part 420

Foreign investments in U.S., Government securities, Investments,

Reporting and recordkeeping requirements.

For the reasons set out in the preamble, 17 CFR Chapter IV,

subchapter A is proposed to be amended as follows:

PART 400--RULES OF GENERAL APPLICATION

1. The authority citation for part 400 is revised to read as

follows:

Authority: 15 U.S.C. 78o-5.

2. In Sec. 400.1, paragraph (e) is added as follows:

Sec. 400.1 Scope of regulations.

* * * * *

(e) Section 104 of the Government Securities Act Amendments of 1993

(Pub. L. 103-202, 107 Stat. 2344) amended Section 15C of the Act (15

U.S.C. 78o-5) by adding a new subsection (f), authorizing the Secretary

of the Treasury to adopt rules to require specified persons holding,

maintaining or controlling a large position in to-be-issued or

recently-issued Treasury securities to report such a position and make

and keep records related to such a position. Part 420 of this

subchapter contains the rules governing large position reporting.

* * * * *

3. Part 420 is added to read as follows:

PART 420--LARGE POSITION REPORTING

Sec.

420.1 Applicability.

420.2 Definitions.

420.3 Reporting.

420.4 Recordkeeping.

420.5 Effective Date.

Appendix A to Part 420--Separate Reporting Entity

Appendix B to Part 420--Sample Large Position Report

Authority: 15 U.S.C. 78o-5(f).

Sec. 420.1 Applicability.

(a) This part, including the Appendices, is applicable to all

persons that participate in the government securities market,

including, but not limited to, government securities brokers and

dealers, depository institutions, registered investment companies,

registered investment advisers, pension funds, hedge funds and

insurance companies, that may control a reportable position in a

recently-issued Treasury bill, note or bond as those terms are defined

in Sec. 420.2.

(b) Notwithstanding paragraph (a) of this section, foreign central

banks, foreign governments and international monetary authorities are

exempt from this part for the portion of any reportable position they

control that is held at the Federal Reserve Bank of New York.

(c) Notwithstanding paragraph (a) of this section, Federal Reserve

Banks are exempt from this part for the portion of any reportable

position they control for their own account.

(d) Notwithstanding the definition of recently-issued, the

Department reserves the right to collect large position information on

Treasury security issues that are older than those specified, provided

that such action is consistent

[[Page 65227]]

with the purposes of the Act (15 U.S.C 78o-5(f)).

Sec. 420.2 Definitions.

For the purposes of this part:

(a) ``Aggregating entity'' means a single entity (e.g., a parent

company or affiliate) that is combined with other entities, as

specified in paragraph (i) of this section, to form a reporting entity.

In those cases where an entity has no affiliates, the aggregating

entity is the same as the reporting entity.

(b) ``Control'' means having the authority to exercise investment

discretion over the purchase, sale, retention or financing of specific

Treasury securities. Only one entity should be considered to have

investment discretion over a particular position.

(c) ``Gross financing position'' is the sum of the gross par

amounts of a security issue received from financing transactions,

including, but not limited to, reverse repurchase transactions, bonds

borrowed, securities received in pledge, and collateralized credit

extended. In calculating the gross financing position, a reporting

entity may not net its positions against repurchase transactions,

securities loaned, securities pledged or other deliveries of the

security issue. However, a reporting entity may elect to reduce its

gross financing position by the par amount of the security received in

transactions: in which the counterparty retains the right to substitute

securities; that are subject to third party custodial relationships; or

that are hold-in-custody reverse repurchase agreements.

(d) ``Large position threshold'' means, with respect to a

reportable position, the dollar par amount such position must equal or

exceed in order for a reporting entity to be required to submit a large

position report. The large position threshold will be announced by the

Department and may vary with each notice of request to report large

position information and with each specified Treasury security.

However, under no circumstances will a large position threshold be less

than $2 billion.

(e) ``Net fails position'' is the net par amount of ``fails to

receive'' less ``fails to deliver'' in the same security. The net fails

position, as reported, may not be less than zero.

(f) ``Net trading position'' is the net sum of the following

respective positions in the specific security issue:

(1) Cash/immediate net settled positions;

(2) Net when-issued positions;

(3) Net forward positions, including next-day settling;

(4) Net futures contract positions that require delivery of the

specific security; and

(5) Net holdings of STRIPS principal components of the security.

(g) ``Recently-issued'' means:

(1) With respect to Treasury securities that are issued quarterly

or more frequently, the three most recent issues of the security (e.g.,

in early April, the January, February, and March 2-year notes).

(2) With respect to Treasury securities that are issued less

frequently than quarterly, the two most recent issues of the security.

(3) With respect to a reopened security, the entire issue of a

reopened security (older and newer portions) based on the date the

reopened security is reissued by the Department (or scheduled to be

reissued for when-issued securities).

(4) For all Treasury securities, a security announced to be issued

or auctioned but unissued (when-issued), starting from the date of the

issuance announcement. The most recent issue of the security is the one

most recently announced.

(h) ``Reportable position'' is the sum of the net trading

positions, gross financing positions and net fails positions in a

specified issue of Treasury securities collectively controlled by a

reporting entity.

(i) ``Reporting entity'' means any corporation, partnership, person

or other entity and its affiliates. For the purposes of this

definition, an affiliate is any: entity that is more than 50% owned,

directly or indirectly, by the aggregating entity or by any other

affiliate of the aggregating entity; person or entity that owns,

directly or indirectly, more than 50% of the aggregating entity; person

or entity that owns, directly or indirectly, more than 50% of any other

affiliate of the aggregating entity; or entity, a majority of whose

board of directors or a majority of whose general partners are

directors or officers of the aggregating entity or any affiliate of the

aggregating entity.

(1) Subject to the conditions prescribed in Appendix A, one or more

aggregating entities, either separately or together with one or more

other aggregating entities, may be recognized as a separate reporting

entity. Any entity that previously has received recognition from the

Treasury as a separate bidder in Treasury auctions pursuant to Appendix

A of 31 CFR Part 356 is also recognized as a separate reporting entity

without further action.

(2) Notwithstanding this definition, any persons or entities that

intentionally act together with respect to the investing in, retention

of, or financing of, Treasury securities are considered, collectively,

to be one reporting entity.

Sec. 420.3 Reporting.

(a) A reporting entity is subject to the reporting requirements of

this section only when its reportable position equals or exceeds the

large position threshold specified by the Department for a specific

Treasury security issue. The Department shall provide notice of such

threshold by issuance of a press release and subsequent publication of

the notice in the Federal Register. Such notice will identify the

Treasury security issue to be reported; the date or dates (as of close

of business) for which the large position information must be reported;

and the applicable large position threshold for that issue. It is the

responsibility of a reporting entity to take reasonable actions to be

aware of such a notice.

(b) A reporting entity shall select one entity from among its

aggregating entities (i.e., the designated filing entity) as the entity

designated to compile and file a report on behalf of the reporting

entity. The designated filing entity shall be responsible for filing

any large position reports in response to a notice issued by the

Department and for maintaining the additional records prescribed in the

applicable paragraph of Sec. 420.4.

(c) (1) In response to a notice issued under paragraph (a) of this

section requesting large position information, a reporting entity with

a reportable position that equals or exceeds the specified large

position threshold stated in the notice shall compile and report the

amounts of the reporting entity's reportable position, as follows:

(i) net trading position comprising:

(A) cash/immediate net settled positions,

(B) net when-issued positions,

(C) net forward positions, including next-day settling,

(D) net futures contracts that require delivery of the specific

security, and

(E) net holdings of STRIPS principal components of the security;

(ii) gross financing position; and

(iii) net fails position.

(2) The large position report should include the following two

additional items as memoranda:

(i) A total that includes the amounts of securities delivered

through repurchase agreements, securities loaned, securities pledged,

and collateralized loans and other securities deliveries. This total

should not be reflected in the gross financing position; and

(ii) If the reporting entity has elected to exercise the option

available in

[[Page 65228]]

Sec. 420.2(c) to reduce the amount of the gross financing position by

the par amount of securities received but over which the reporting

entity did not have effective control, the amount not included. The

total amount of reduction should be deducted from the gross financing

position prior to determining the reportable position.

(3) An illustration of a sample report is contained in Appendix B.

Each of the net trading position elements shall be netted and reported

as the applicable positive or negative number (or zero). The gross

financing position and net fails position should each be reported as a

single entry. If the amount of the net fails position is zero or less,

report zero. All of these items should be reported in the order

specified above. All position amounts and their components should be

reported at par in millions of dollars.

(4) All balances must be reported as of the close of business of

the reporting date(s) specified in the notice.

(5) Each submitted report must include the following administrative

information in addition to the reportable position: the name of the

reporting entity, the address of the principal place of business, the

name and address of the designated filing entity, the Treasury security

that is being reported, the CUSIP number, the report date or dates for

which information is being reported, the date the report was submitted,

the name and telephone number of the person to contact regarding

information reported, and the name and position of the authorized

individual submitting this report. The report must also be signed by

the authorized individual, who must be one of the following: the chief

financial officer, the chief operating officer, the chief executive

officer, or the managing partner or equivalent of the designated filing

entity. The designated filing entity must also include in its report,

immediately preceding the signature, a statement of certification as

follows:

The reporting entity submitting this report and the person(s) by

whom it is executed hereby certify that all information contained in

the report is accurate and complete and that the reporting entity is

in compliance with the requirements of 17 CFR Part 420.

(6) The report must be filed before noon Eastern time on the second

business day following issuance of the press release.

(d) A report to be filed pursuant to paragraph (c) will be

considered filed when received by the Federal Reserve Bank of New York.

The report may be filed in any manner acceptable to the Federal Reserve

Bank of New York.

(e) A reporting entity that has filed a report pursuant to

paragraph (c) shall, at the request of the Department or the Federal

Reserve Bank of New York, timely provide any supplemental information

pertaining to such report.

Sec. 420.4 Recordkeeping.

(a)(1) Notwithstanding the provisions of paragraphs (b) and (c) of

this section, an aggregating entity must make and maintain records

pursuant to this part as of its effective date, but only if the

aggregating entity has controlled a portion of its reporting entity's

reportable position in any Treasury security when such reportable

position of the reporting entity has equaled or exceeded the minimum

large position threshold specified in Sec. 420.2(d) (i.e., $2 billion)

during the prior two-year period ending [90 days after publication of

the final rule]. Subsequent to the effective date, an aggregating

entity that controls a portion of its reporting entity's reportable

position in a recently-issued Treasury security, when such reportable

position of the reporting entity equals or exceeds the minimum large

position threshold, shall be responsible for making and maintaining the

records prescribed in this part.

(2) In the case of a reporting entity whose reportable position in

any Treasury security has equaled or exceeded the minimum large

position threshold during the prior two-year period ending [90 days

after publication of the final rule], each such reporting entity's

designated filing entity shall submit a letter to the Federal Reserve

Bank of New York certifying that it has in place, or will have in place

by the effective date, a recordkeeping system (including policies and

procedures) capable of making, verifying the accuracy of, and

preserving the records required pursuant to this section.

(3) The letter specified in paragraph (a)(2) of this section must

be signed by one of the following: the chief financial officer, the

chief operating officer, the chief executive officer, or the managing

partner or equivalent of the designated filing entity and must be

received by the Federal Reserve Bank of New York no later than [120

days after publication of the final rule].

(b) Records to be made and preserved by entities that are subject

to the recordkeeping provisions of the Commission, the Department, or

the appropriate regulatory agencies for financial institutions. As an

aggregating entity, compliance by a registered broker or dealer,

registered government securities broker or dealer, noticed financial

institution, depository institution that exercises investment

discretion, registered investment advisor, or registered investment

company with the applicable recordkeeping provisions of the Commission,

the Department, or the appropriate regulatory agencies for financial

institutions shall constitute compliance with this section, provided

that if such entity is also the designated filing entity it:

(1) Makes and keeps copies of all large position reports filed

pursuant to this part;

(2) Makes and keeps supporting documents or schedules used to

compute data for the large position reports filed pursuant to this

part;

(3) Makes and keeps a chart showing the organizational entities

that are aggregated (if applicable) in determining a reportable

position; and

(4) With respect to recordkeeping preservation requirements that

contain more than one retention period, preserves records required by

paragraphs (b)(1)-(3) of this section for the longest record retention

period of applicable recordkeeping provisions.

(c) Records to be made and kept by other entities. (1) An

aggregating entity that is not subject to the provisions of paragraph

(b) of this section shall make and preserve a journal, blotter, or

other record of original entry containing an itemized record of all

transactions that fall within the definition of a reportable position,

including information showing the account for which such transactions

were effected and the following information pertaining to the

identification of each instrument: the type of security, the par

amount, the CUSIP number, the trade date, the maturity date, the type

of transaction (e.g., a reverse repurchase agreement), and the name or

other designation of the person from whom sold or purchased.

(2) If such aggregating entity is also the designated filing

entity, then in addition it shall make and preserve the following

records:

(i) copies of all large position reports filed pursuant to this

part;

(ii) supporting documents or schedules used to compute data for the

large position reports filed pursuant to this part; and

(iii) a chart showing the organizational entities that are

aggregated (if applicable) in determining a reportable position.

(3) With respect to the records required by paragraphs (c) (1) and

(2) of this section, each such aggregating entity shall preserve such

records for a period of not less than six years, the first two years in

an easily accessible place. If an aggregating entity maintains its

records at a location other than its principal place of business, the

aggregating entity must maintain an

[[Page 65229]]

index that states the location of the records, and such index must be

easily accessible at all times.

Sec. 420.5 Effective Date.

The provisions of this part, except for Sec. 420.4(a), shall be

first effective on [180 days from the date of publication of the final

rule. If the date does not fall on the last day of the month, then move

the date to the end of the month.].

Appendix A to Part 420--Separate Reporting Entity

Subject to the following conditions, one or more aggregating

entity(ies) (e.g., parent or subsidiary) in a reporting entity,

either separately or together with one or more other aggregating

entity(ies), may be recognized as a separate reporting entity. All

of the following conditions must be met for such entity(ies) to

qualify for recognition as a separate reporting entity:

(1) Such entity(ies) must be prohibited by law or regulation

from exchanging, or must have established written internal

procedures (i.e., Chinese walls) designed to prevent the exchange of

information related to transactions in Treasury securities with any

other aggregating entity;

(2) Such entity(ies) must not be created for the purpose of

circumventing these large position reporting rules;

(3) Decisions related to the purchase, sale or retention of

Treasury securities must be made by employees of such entity(ies).

Employees of such entity(ies) who make decisions to purchase or

dispose of Treasury securities must not perform the same function

for other aggregating entities; and

(4) The records of such entity(ies) related to the ownership,

financing, purchase and sale of Treasury securities must be

maintained by such entity(ies). Those records must be identifiable--

separate and apart from similar records for other aggregating

entities.

To obtain recognition as a separate reporting entity, each

aggregating entity or group of aggregating entities must request

such recognition from the Department pursuant to the procedures

outlined in Sec. 400.2(c) of this title. Such request must provide a

description of the entity or group and its position within the

reporting entity, and provide the following certification:

``[Name of the entity(ies)] hereby certifies that to the best of

its knowledge and belief it meets the conditions for a separate

reporting entity as described in Appendix A to 17 CFR part 420. The

above named entity also certifies that it has established written

policies or procedures, including ongoing compliance monitoring

processes, that are designed to prevent the entity or group of

entities from:

``(1) Exchanging any of the following information with any other

aggregating entity (a) positions that it holds or plans to acquire

in a Treasury security; (b) investment strategies that it plans to

follow regarding Treasury securities; and (c) financing strategies

that it plans to follow regarding Treasury securities, or

``(2) In any way intentionally acting together with any other

aggregating entity with respect to the purchase, sale, retention or

financing of Treasury securities.

``The above-named entity agrees that it will promptly notify the

Department in writing when any of the information provided to obtain

separate reporting entity status changes or when this certification

is no longer valid.''

Any entity that previously has received recognition as a

separate bidder in Treasury auctions from the Department pursuant to

31 CFR Part 356 is also recognized as a separate reporting entity

without further action.

Appendix B to Part 420--Sample Large Position Report.

Formula for Determining a Reportable Position

[$ Amounts in millions at par value]

Date For Which Information Is Being Reported: ______

1. Cash/Immediate Net Settled Positions...................... $____

2. Net When-Issued Positions for To-Be-Issued and Reopened

Issues...................................................... +$____

3. Net Forward Settling Positions Including Next Day Settling +$____

4. Net Positions in Futures Contracts Requiring Delivery of

the Specific Security....................................... +$____

5. Net STRIPS Principal Components of the Specific Security.. +$____

6. Gross Financing Position (Includes total of securities

received through reverse repos, bonds borrowed, securities

received in pledge, collateralized credit extended.)........ +$____

7. Net Fails Position (Fails to Receive less Fails to

Deliver. If equal to or less than 0, report 0.)............. +$____

8. Total Reportable Position................................. =$____

Memorandum #1: Report one total which includes the gross par

amounts of securities delivered through repurchase

agreements, securities loaned, securities pledged, and

collateralized loans. Not included in item #6 (Gross

Financing Position) as reported above....................... $____

Memorandum #2: If the optional exclusion was taken to reduce

the amount of the Gross Financing Position by the amount of

securities received but that the reporting entity did not

have effective control over (e.g., third party custodial

structures, hold-in-custody relationships, counterparty

retained contractual right to substitute), indicate the

total amount of reduction here. Deduct from item #6 (Gross

Financing Position)......................................... $____

Administrative Information To Be Provided in the Report

Name of Reporting Entity:

Address of Principal Place of Business:

Name and Address of the Designated Filing Entity:

Treasury Security Reported on:

CUSIP Number:

Date or Dates for Which Information Is Being Reported:

Date Report Submitted:

Name and Telephone Number of Person to Contact Regarding

Information Reported:

Name and Position of Authorized Individual Submitting this

Report (Chief Financial Officer, Chief Operating Officer, Chief

Executive Officer, or Managing Partner or Equivalent of Designated

Filing Entity):

Statement of Certification: ``The reporting entity submitting

this report and the person(s) by whom it is executed hereby certify

that all information contained in the report is accurate and

complete and that the reporting entity is in compliance with the

requirements of 17 CFR Part 420.''

Signature of Authorized Person Named Above:

* * * * *

Date:

Darcy Bradbury,

Deputy Assistant Secretary (Federal Finance).

[FR Doc. 95-30766 Filed 12-14-95; 1:59 pm]

BILLING CODE 4810-39-W