Regulations Governing United States Treasury Certificates of Indebtedness, Treasury Notes, and Treasury BondsState and Local Government Series

SUMMARY: The Department of the Treasury hereby publishes a proposed

rule governing United States Treasury Certificates of Indebtedness,

Notes, and Bonds of the State and Local Government Series (SLGS). These

securities are available for purchase by issuers of state and local

government bonds described in section 103 of the Internal Revenue Code

for proceeds (or amounts treated as proceeds) which are subject to

yield restrictions or arbitrage rebate requirements of the Income Tax

regulations under sections 103, 148, 149 and 150 of the Internal

Revenue Code (tax regulations). This document proposes changes to make

the SLGS securities program more flexible.

DATES: Comments must be received on or before August 26, 1996.

ADDRESSES: Copies of this proposed rule have also been made available

for downloading from the Bureau of the Public Debt home page at the

following address:

http://www.ustreas.gov:treasury/bureaus/pubdebt/pubdebt.html

Comments should be sent to: Division of Special Investments, Bureau of

the Public Debt, Department of the Treasury, 200 3rd St., P.O. Box 396,

Parkersburg, WV 26101-0396. Comments received will be available for

public inspection and downloading on the Internet and for inspection

and copying at the Treasury Department Library, FOIA Collection, Room

5030, Main Treasury Building, 1500 Pennsylvania Avenue NW, Washington,

D.C. 20220. Persons wishing to visit the library should call 202-622-

0990 for an appointment. Comments may also be sent through the Internet

to Fred Pyatt, Director, or Howard Stevens, Supervisory Program

Analyst, Division of Special Investments at [email protected] or

[email protected]. When sending comments by Internet, please

provide your full name and mailing address.

FOR FURTHER INFORMATION CONTACT: Fred Pyatt, Director, or Howard

Stevens, Supervisory Program Analyst, Division of Special Investments,

at 304-480-7752 or Ed Gronseth, Deputy Chief Counsel, or Jim Kramer-

Wilt, Attorney/Adviser, Office of the Chief Counsel, at 304-480-5190.

SUPPLEMENTARY INFORMATION:

I. Background.

The Department of the Treasury, Bureau of the Public Debt, is

attempting to make the SLGS securities program more attractive and

flexible for State and local government issuers of debt obligations

that are subject to the arbitrage and rebate rules of the Internal

Revenue Code. It is the Department's intent to do so in a manner

consistent with tax policy objectives and in a manner that is cost

effective.

In recent years, market participants have advised the Department

that aspects of the existing SLGS securities regulations impose burdens

that are not needed or cost effective. On April 30, 1996, the

Department published an Advanced Notice of Proposed Rulemaking, noting

several changes the Department was considering in order to make the

SLGS securities program more flexible. The changes under consideration

were to: (1) Eliminate the ``all or nothing'' certification, (2)

provide for subscriptions and redemptions in increments of less than

$100 above the $1,000 minimum, (3) reduce the minimum maturity for zero

interest certificates of indebtedness, (4) reduce the time for advance

notice between subscription and issue date for time deposit and special

zero interest SLGS securities, (5) make SLGS securities pricing more

consistent with open market Treasury securities, (6) permit SLGS

securities to be purchased with funds subject to rebate as well as

yield restriction, (7) revise the demand deposit program, (8) change

the formula for determining the redemption value of SLGS securities,

including eliminating the restriction against premium redemption, (9)

permit zero interest time deposit SLGS securities to be redeemed

without penalty; and lastly, (10) permit the purchase of SLGS

securities with the proceeds of previously redeemed SLGS securities or

with open market Treasury securities.

There were eight letters received commenting on the Advanced Notice

of Proposed Rulemaking (ANPR). In general, the comments were in favor

of the ten items contained in the ANPR. Several comments suggested

specific parameters for some of the ten items while others suggested

the Treasury Department consider changes not contained in the ANPR.

Following is a summary of the issues addressed in the comments and an

explanation of the action taken with respect to each comment.

Proposal No. 1--The Department proposed the elimination of the

``all or nothing'' certification which requires all yield restricted

investments be invested either all in SLGS securities or all in open

market Treasury securities. All comments were strongly in favor of the

elimination of the ``all or nothing'' certification. The Department has

included this proposal in the proposed rule.

Proposal No. 2--The Department proposed to allow subscriptions for

time deposit SLGS securities in increments of less than $100 above the

$1,000 minimum investment and to permit partial redemptions in

increments of less than $100, so long as an account balance is at least

$1,000 after partial redemption. Most comments were in favor of these

items. One comment stated there would be an increased administrative

burden on agent banks and on the Department. The Department has

determined to make these changes which would result in a more flexible

program. Please refer to the comment on the elimination of the special

zero interest securities following Proposal No. 10.

One comment suggested the Department reduce the $1,000 minimum

investment now required. The Department has determined that $1,000 is a

reasonable minimum amount in light of the nature of the SLGS securities

program and is not including this suggestion in the proposed rule.

Proposal No. 3--The Department proposed to reduce the minimum

maturity for zero interest time deposit certificates of indebtedness.

All comments were in favor of this item and the Department is proposing

a reduction from thirty to fifteen days for zero interest time deposit

securities. One comment urged the Department to make all SLGS

securities available in any maturity. The Department has determined

that pricing interest bearing SLGS securities of less than thirty days

maturity is not feasible, given the volatility of the market. The

Department has also decided not to reduce the minimum maturity of zero

interest SLGS securities to fewer than fifteen days due to operational

constraints. Please refer to the comment on the elimination of special

zero interest securities following Proposal No. 10.

Proposal No. 4--The Department proposed to reduce the time between

the date of subscription and the date of issue for time deposit SLGS

securities. All comments were in favor of this item.

[[Page 39229]]

One comment suggested that the time be reduced to no longer than five

business days. Accordingly, the Department is proposing a minimum

notification of five days for subscriptions of $10 million or less and

a minimum notification of seven days for subscriptions of over $10

million.

Proposal No. 5--The Department proposed a reduction of the twelve

and one-half basis points differential between SLGS securities rates

and rates of similar Treasury securities in the open market. All

comments were in favor of this item except one that recommended it

remain unchanged. There were specific suggestions on the basis point

differential ranging from zero to five. The Department is proposing the

basis point differential be reduced to five basis points.

Proposal No. 6--The Department proposed investors be able to

purchase SLGS securities with funds subject to rebate as well as yield

restrictions. All comments were in favor of this item. The Department

will include this item in the proposed rule. Other comments suggested:

(a) Replace all eliminated certifications with a gross proceeds

certification under Section 1.148-1(b) of the Income Tax regulations.

(b) Allow all gross proceeds to be invested in SLGS securities.

(c) Offer an instrument similar to a Guaranteed Investment Contract

and provide for automatic reinvestment of SLGS securities.

With respect to (a) and (b) above, the Department is proposing to

remove all certifications from these regulations, including a gross

proceeds certification. The Department believes that the nature and

general scope of the program as described in Section 344.0(a) limits

investment in SLGS securities to gross proceeds of tax-exempt bonds.

With respect to (c), the Department believes that other changes

being proposed to improve the SLGS program will address issuers'

concerns about reinvestment risks. In addition, under this proposed

rule, for example, an issuer would be able to make reinvestments and to

invest interest payments at the current rate, provided it follows the

revised notice requirements. Please refer to Proposal No. 10. The

Department has determined not to offer products similar to Guaranteed

Investment Contracts under the proposed rule.

Proposal No. 7--The Department proposed revising the SLGS Demand

Deposit program by adjusting the rate formula and by eliminating

certifications that are duplicative of current tax regulations or could

be better administered through the tax regulations. One comment

suggested the program be eliminated altogether. This program is

congressionally mandated, however, and the Department is therefore

proposing to make it more attractive and easier to use. Specifically,

the Department is proposing to eliminate the certifications and to

reduce the Treasury administrative cost in the rate formula. Also, the

Department is proposing to remove the $35 million dollar cap on

investments in the Demand Deposit program.

In order to facilitate the administration of the Demand Deposit

program under the flexible rules proposed, for subscriptions of more

than $10 million, Public Debt must receive the required notice between

the date of subscription and date of issue in no less than seven days,

rather than the present required notice period of three days. Receipt

of notice by Public Debt between date of subscription and date of issue

for subscriptions of less than $10 million would be increased to five

days.

Proposal No. 8--The Department proposed to change the formula for

determining the redemption value of SLGS securities in a manner which

could result in a premium for the subscriber in cases where the

Treasury borrowing rate is lower than the stated interest rate of the

SLGS security. All comments were in favor of this change. The

Department is proposing to change the formula in a manner that could

result in a premium upon redemption. There were five specific

suggestions on this item:

(a) The new redemption formula should be made available for SLGS

securities issued prior to September 1, 1989. The Department has

considered the suggestion and has decided not to change formulas that

apply to previously purchased SLGS securities.

(b) Change the current irrevocability of an early redemption notice

to one where a six-month early redemption penalty results. The

Department has determined that a six-month penalty would not be an

adequate deterrent to the revocation of an early redemption notice. An

issuer should not be harmed by the retention of this penalty as it

would be able to roll over its investments.

(c) Reduce the minimum holding period for time deposit notes and

bonds, before allowing an early redemption, from one year to thirty

days or less. The Department is adopting this suggestion and proposes

to permit thirty days as a minimum period for holding time deposit

notes and bonds.

(d) In redemption calculations, take into consideration the maximum

interest rate that an issuer could have subscribed for, instead of the

actual rate on the outstanding security. The purpose of the redemption

formula is to make the Department whole. This suggestion would be

inconsistent with this purpose. In addition, issuers would have the

flexibility to mix zero interest SLGS securities with either open

market securities or with SLGS securities bearing the maximum rate.

This should eliminate the problems commenters have cited. For these

reasons, the Department is not incorporating this suggestion into the

new formula.

(e) Address the issue of whether a premium constitutes proceeds and

how the premium should be treated for yield purposes. The issue

identified in this suggestion is more appropriately determined under

Section 148 of the tax regulations.

Proposal No. 9--The Department proposed to allow zero interest time

deposit SLGS securities to be redeemed early at par. All comments were

in favor of this item. The Department has included this item in the

proposed rule for zero interest time deposit SLGS securities.

Proposal No. 10--The Department proposed to permit the purchase of

SLGS securities with the proceeds of previously redeemed SLGS

securities or open market Treasury securities. All comments were in

favor of this item. The Department is proposing to permit the purchase

of SLGS securities with proceeds of previously redeemed SLGS securities

or open market Treasury securities.

Discontinuing the Issuance of Special Zero Interest Securities

The Department is proposing to discontinue the issuance of special

zero interest securities. Special zero interest securities were

instituted to allow issuers to blend special zero interest securities

with above-yield open market investments in instances where proceeds

became subject to yield restrictions at some date after the issuance of

the bonds. The current regulations provide that special zero interest

securities may be redeemed without penalty as a further accommodation

to the types of situations where this program could be used.

Under the proposed rule, zero interest bearing time deposit

securities would now be made available for purposes of rebate

compliance, could be in the same escrow as open market investments, and

could be redeemed early without penalty.

In addition, the tax regulations provide issuers with the ability

to make

[[Page 39230]]

``yield reduction payments'' for certain yield-restricted investments

that are invested over the yield on the bonds. Yield reduction payment

provisions cover virtually all instances when an issuer would use

special zero interest securities, greatly reducing the need for this

program.

Therefore, there seems to be no reason to continue the issuance of

special zero interest securities. The provisions for redemption of

these securities would remain to govern the issues of special zero

interest securities still outstanding.

Additional Comments

Other comments received, not pertaining to the ten items in the

ANPR, suggested the Department make further changes to the SLGS

securities program as follows:

(a) Issue zero coupon deep discount bills, notes and bonds for

which the issuer could specify the maturity date. Interest on these

securities would accrue and be paid at maturity. The Department is

revising its SLGS computer system which currently is not capable of

handling such securities. The Department is not including this

suggestion in the proposed rule at this time, but will reconsider this

suggestion in the future when its revised computer system is

implemented. Until then, there should be little inconvenience because

purchasers can satisfy their requirements by purchasing deep discount

zero coupon securities in the open market.

(b) Replace the penalty for revocation of the issuance of a SLGS

security under Section 344.1(f)(3) (a six-month prohibition against

subscribing for SLGS securities) with a monetary penalty. The

Department has determined the six-month penalty is an adequate

deterrent for non-settlement of a SLGS subscription and is not

including this suggestion in the proposed rule.

(c) Offer to bid and supply a portfolio of open market Treasury

securities in circumstances where SLGS securities are not a viable

investment alternative. The Department has determined that with all the

changes proposed, SLGS securities are a viable investment. The

Department is not including this suggestion in the proposed rule.

(d) Amend Section 344.3(b)(3) to permit the acceleration, as well

as the postponement of, the delivery dates of SLGS securities within

administratively acceptable time limits. The Department has determined

this suggestion has been sufficiently addressed in Proposal No. 4.

(e) Revise the procedures to be followed when the sale of SLGS

securities is suspended due to a debt ceiling limit and include an

automatic waiver under Section 344.4 of all penalties for cancellation

of a subscription. Due to varying circumstances in the event of a debt

ceiling limit, the Department needs flexibility to deal with the

various issues that arise during periods when sales are suspended due

to debt ceiling limitations and has decided not to incorporate this

suggestion in the proposed rule. Treasury, however, has never failed to

deliver SLGS securities for subscriptions already accepted due to debt

ceiling limitations.

(f) Make current SLGS securities interest rates, SLGS securities

regulations and historical SLGS securities rates available on the

Internet, or some other ``free'' resource, rather than on the Commerce

Department's Economic Bulletin Board. The Department is currently

exploring the dissemination of such information by electronic means and

will address this issue in the future. In the meantime these rates are

now provided free by phone or fax by the Division of Special

Investments, Bureau of the Public Debt, by calling its automated fax at

(304) 480-7548 or by calling (304) 480-7752.

(g) Permit the filing of electronic subscriptions. The Department

is considering the electronic filing of subscriptions as a part of its

computer system redesign now in progress. This suggestion will be

addressed in a subsequent regulation.

(h) Clarify who is to be listed as the ``beneficial owner'' for

purposes of 31 CFR Part 306. The proposed rule clarifies that for

purposes of this Section, the ``beneficial owner'' in Sections 344.0(b)

and 344.3(b)(1), whose Tax Identification Number is used, is the state

or local government entity, not the trustee or conduit borrower. The

six-month penalty for cancellation would therefore be applied to the

state or local government entity.

(i) Modify the initial subscription requirements to require certain

identifying characteristics of the source of proceeds to be invested so

that in the event of a failure to settle, only those subscriptions for

the same proceeds are precluded, rather than the Department

``blacklisting'' any subscription submitted under that Taxpayer

Identification Number. The Department has determined that monitoring

such proceeds would not be administratively feasible and that a six-

month penalty is an adequate deterrent appropriately applied at the

issuer level. The Department is therefore not including this suggestion

in the proposed rule.

(j) Make SLGS securities transferrable. The Department has

considered the general issue of transferability and does not intend to

change the prohibition against transfer now found in Section 344.1(b).

To the extent this suggestion of transferability refers to the transfer

of an account, such as a reserve fund investment, by an issuer from one

bond issue to another bond issue of that subscriber under the same

Taxpayer Identification Number, or between accounts of different

security types, i.e., demand deposit to time deposit (as now prohibited

by Section 344.1(c)), or from one trustee to another, the clarification

of the beneficial owner should address the concern of the commenter.

The Department however invites further comments on this suggestion.

(k) Permit an issuer to notify the Bureau of the Public Debt that

it is pricing a transaction for which it intends to invest in SLGS

securities and thereby lock in the day's SLGS securities rate for a

period of up to three days. The Department has determined Proposal No.

4 sufficiently addresses this suggestion. Subscribers for $10 million

or less must give at least five days notice and subscribers for more

than $10 million must give seven days notice.

(l) Eliminate the 10-year maximum maturity on special zero interest

SLGS securities and eliminate any restrictions on their use, thereby

making it the only zero yielding SLGS security. The Department has

proposed to discontinue the issuance of special zero interest SLGS

securities. Please refer to the expanded comment on this issue

following Proposal No. 10.

(m) Permit an issuer to restructure its SLGS portfolio by

exchanging purchased SLGS securities for ones with similar cash flows.

The Department has determined the proposal to allow easing of the early

redemption rules for SLGS securities and the rollovers of investments

in SLGS securities with previously redeemed SLGS securities would

increase an issuer's flexibility in restructuring its portfolio. The

Department is not including this suggestion in the proposed rule.

(n) Allow the forward purchase of SLGS securities more than the

currently permitted sixty days in Section 344.4. The Department has

determined the flexibility provided in this proposed rule is

sufficient. The Department has determined the benefit to the market is

insufficient to overcome the administrative burden on the Department of

maintaining subscription requests for a lengthy period and is not

including this suggestion in the proposed rule.

(o) Pay issuers the redemption value of matured SLGS securities by

1:00 p.m. on the date of maturity. The Department

[[Page 39231]]

makes ACH payments available to the Federal Reserve Banks in time for

posting at the commercial banks at the opening of the business day on

the date of maturity. As the suggestion of a 1:00 p.m. payment on

maturity date is now being met by the Department, it will not be

included in the proposed rule.

(p) The final comment raised several issues related to the yield

restriction and rebate rules as they apply to pooled loan programs. The

Department believes the changes to the SLGS program in the proposed

regulations would assist issuers of pooled loan bonds. Other

suggestions would be more appropriately dealt with in the tax

regulations.

As a result of these comments and decisions within the Treasury

Department, this is being published in proposed form to give market

participants an additional comment period.

II. Section By Section Summary

Subpart A--General Information

Provisions included in the general information section apply to

time deposit and demand deposit State and Local Government Series

securities. Proposed changes from the 1995 regulations are as follows:

Subpart A--General Information

(1) Section 344.0(b)--This section would be changed to redefine the

term ``government body'' to make it clear SLGS securities are issued

only to state and local governments and not to conduit borrowers.

(2) Section 344.0(d)--A new section would be added to indicate that

time deposit SLGS securities would be issued in a minimum amount of

$1,000, or in any increments of not less than $1.00. Demand Deposit

securities could be issued in any increment over the $1,000 minimum.

(3) Section 344.1(a)--This section would be changed to note that

copies of the circular may be obtained from the Division of Special

Investments.

(4) Section 344.1(h)--A new section would be added on noncompliance

which applies to all subparts and the present noncompliance section in

each subpart would be deleted. This section also clarified that late

payment fees and administrative fees are due on demand.

(5) Section 344.1(i)--Another general section would be added,

titled General Redemption Provisions, stating a security may not be

called for redemption by the Secretary of the Treasury prior to

maturity. If a security is scheduled for redemption on a non-business

day, it would be redeemed on the next business day. This section would

apply to all subparts and duplications of this section that exist in

the present regulations would be deleted.

(6) Section 344.1(j)--A new section would be added to clarify that

any reference to days refers to calendar days, unless otherwise noted.

Subpart B--Time Deposit Securities

(1) Section 344.2(a)(1)--The reference to the $1,000 minimum would

be deleted as it would be covered in 344.0(d). Section 344.0(d) would

also state that increments above the minimum amount could be purchased

for not less than $1.00 for time deposit securities. The minimum

maturity period for zero percent certificates of indebtedness would be

reduced from thirty days to fifteen days.

(2) Section 344.2(a)(2)--The reference to the $1,000 minimum amount

and the $100 increment above this amount would be deleted as it would

be covered in the new general section, 344.0(d).

(3) Section 344.2(a)(3)--The reference to the $1,000 minimum amount

and the increment above this amount would be deleted as it would be

covered in a new general section, 344.0(d).

(4) Section 344.2(b)--The last sentence of this section would state

the rates specified in the tables are five basis points below the then

current estimated Treasury borrowing rate for a security of comparable

maturity. Section 344.2(c)(2) would clarify that the Department may

employ alternative methods of payment other than by ACH.

(5) Section 344.2(c)(2)--This section would be amended to provide

for payment of redemptions prior to maturity by Fedwire.

(6) Section 344.3(b)(1)--This section would be amended to indicate

that subscriptions must be received by Public Debt at least five days

prior to issue date for subscriptions of $10 million or less and seven

days for subscriptions of more than $10 million. Subscriptions of $10

million or less could be canceled without penalty up to five days

before the date of issuance. Subscriptions of more than $10 million

could be canceled without penalty up to seven days before the date of

issuance.

This section would also note that a subscription sent in letter

form would not be accepted unless it provided the Tax Identification

Number of the government body.

In the example of an initial subscription in letter form, the words

``or other entity'' have been deleted to emphasize that the proper Tax

Identification Number to insert is that of the state or local

government owner, not that of a trustee bank or a conduit borrower.

(7) Section 344.3(b)(4)--This section would be revised to read that

no initial subscription would be required where a final subscription is

received at least five days before the issue date for subscriptions of

$10 million or less and at least seven days before the issue date for

subscriptions of over $10 million.

(8) Section 344.3(c)--This section would be amended to eliminate

all certifications other than (3), which is being revised. The ``all or

nothing'' rule of the certification in (1) Is being eliminated to

facilitate the use of the time deposit securities for investment of

proceeds that are subject to arbitrage rebate. This change in the

proposed regulations should alleviate some of the need to calculate

rebate if funds can be invested at the bond yield for a longer term. In

general, to the extent that the certifications were a result of

concerns about abuse of the tax regulations and the SLGS program, the

Department has determined that the yield restriction and rebate rules

are more appropriately enforced under the tax regulations. (In cases of

abuse of the tax regulations which also involve SLGS securities, these

enforcement efforts may be supplemented by the Secretary's authority

under section 344.1(f) to revoke subscriptions.) The certification in

(3) would be revised to apply only to SLGS securities purchased prior

to December 27, 1976. Certifications in (4) would be eliminated because

of certain prior changes to the SLGS securities regulations (such as

the change to daily SLGS securities rates), and because of proposed

changes to the early redemption penalties under section 344.5,

contained in these proposed regulations. Additionally, the word

``beneficial owner'' is being changed to ``government body'' to make it

clear that the proper Tax Identification Number to be used is that of

the government entity.

(9) Section 344.4 General.--This section would be amended to state

that the issue date of a subscription may not exceed by more than sixty

days the date the subscription was received by Public Debt.

(10) Section 344.4(b)--This section would be eliminated as it is

now covered in the general provisions applicable to all SLGS

securities, 344.0(h).

(11) Section 344.5(a)--This section would be eliminated as it would

be covered in the general provisions applicable to all SLGS securities,

344.0(i).

(12) Section 344.5(a)(2)--The word ``subscriber'' is being changed

to ``government body'' to make it clear that

[[Page 39232]]

the proper Tax Identification Number to be used is that of the

government entity.

(13) Section 344.5(b)(1)--This section would be amended to provide

that zero interest certificates may be redeemed before maturity at the

owner's option no earlier than fifteen days before maturity for

certificates of fifteen to twenty-nine days duration and no earlier

than thirty days after the issue date in the case of a note or bond.

(14) Section 344.5(b)(2)--This section would be amended to change

the word ``subscriber'' to ``state or local government body owner'' in

the 3rd sentence of this section. This section would further be amended

to read that notice of redemption must be received by Public Debt no

less than ten days before the requested redemption date, rather than

the current fifteen-day requirement.

(15) Section 344.5(b)(3)--This would be a new section which

provides for the calculation of redemption proceeds for SLGS securities

purchased on or after the effective date of the final rule. This

section would change the formula for determining the early redemption

value of SLGS securities to one where the remaining interest and

principal payments are discounted by the current Treasury borrowing

rate for the remaining term to maturity of the security being redeemed.

This would result in a premium in cases where the Treasury

borrowing rate is lower than the stated interest rate of the SLGS

securities. This section would further refer to Appendix B at the end

of Part 344 for the calculation of the formula.

This section would also read that there would be no market charge

for zero interest time deposit securities. The redemption proceeds for

a zero interest security would therefore be a return of the principal

invested.

Subpart C--Demand Deposit Securities

(1) Section 344.5(a)--This section would be revised to delete the

reference to a $1,000 minimum investment as this would be covered in

the new general section, 344.0(d).

(2) Section 344.6(b)(2)(i)--The Department intends to publish a

Federal Register notice when the SLGS securities regulations are

finalized providing the marginal tax rate and the Treasury

Administrative Cost (TAC) to be used in the demand deposit program. A

reduction in the TAC similar to the reduction to five basis points is

contemplated in the differential between time deposit SLGS security

rates and rates on similar Treasury securities in the open market.

(3) Section 344.7(a)--This section would be amended by stating that

subscriptions for $10 million or less must be received by Public Debt

at least five days prior to the date of issue and would require that

subscriptions over $10 million be received by Public Debt at least

seven days prior to the date of issue.

(4) Section 344.7(c)(1)--This section would be removed since under

the proposed rule, the $35 million cap on issues of demand deposit

securities would be eliminated.

(5) Section 344.7 (c)(2) through (c)(5)--These certifications would

be eliminated because they can be administered more effectively under

the tax regulations of Section 148 of the Internal Revenue Code. The

tax regulations would be amended to reflect the transfer of these

certifications (to the extent not already covered by the tax

regulations).

(6) Section 344.8(b)--This section would be eliminated as it would

be covered in the general section applicable to all SLGS securities,

344.1(h).

(7) Section 344.9(a)--This section will be amended to provide for

redemption payments by Fedwire.

(8) Section 344.9(b)--This section would be amended to state that

notice of redemptions for subscriptions of more than $10 million must

be received at least three business days prior to the scheduled date of

redemption. Redemption notice for subscriptions of $10 million or less

would remain unchanged at one business day.

(9) Section 344.9(c)--This section will be eliminated as the rules

regarding expenditure of proceeds are covered by the tax regulations.

Subpart D--Special Zero Interest Securities

(1) Section 344.10--This section would be amended to add that the

Department has discontinued the issuance of this type of security as of

the effective date of the final rule. The proposed amendment to the

time deposit security subpart, which would permit investment for rebate

and yield restriction purposes, would eliminate the need for a separate

Special Zero Interest Program. Under the proposed revisions, the

following sections of this Subpart would apply only to special zero

interest securities issued before the effective date of the final rule.

Subpart B, governing time deposit securities, would be changed in a

manner that permits time deposit zero interest securities to be

redeemed without penalty. Investors that hold special zero interest

securities issued prior to the effective date of the final rule would

be able to redeem these securities without penalty.

(2) Section 344.11--This section would be eliminated.

(3) Section 344.12--This section would be eliminated.

(4) Section 344.13--This section would now become Section 344.11

and remain in effect for the special zero interest accounts now

outstanding. The minimum holding period for redeeming a note after

issue date would be changed from one year to thirty days. The word

``subscriber'' will be changed to ``government body'' to clarify that

the proper Tax Identification Number to be used is that of the

government entity. Redemption notices must be received by Public Debt

within the proscribed limits.

Appendix A to Part 344--There would be a clarifying statement that

these formulas apply to SLGS securities issued before the effective

date of the final rule.

Appendix B to Part 344--There would be a new formula in this

section for determining the redemption value for all early redeemed

time deposit SLGS securities. This formula would reflect the change

that the remaining interest and principal payments are discounted by

the Treasury borrowing rate for the remaining term to maturity of the

security being redeemed. This would result in a premium in cases where

the Treasury borrowing rate is lower than the stated interest rate of

the SLGS security.

Procedural Requirements

It has been determined this proposed rule is not a significant

regulatory action as defined in Executive Order 12866. Therefore, an

assessment of anticipated benefits, costs and regulatory alternatives

is not required.

Although this rule is being issued to secure the benefit of public

comment, the rule relates to matters of public contract, as well as the

borrowing power and fiscal authority of the United States. The notice

and public procedures requirements of the Administrative Procedure Act

are inapplicable, pursuant to 5 U.S.C. 553(a)(2). As no notice of

proposed rulemaking was required, the provisions of the Regulatory

Flexibility Act (5 U.S.C. 601 et seq.) do not apply.

The proposed rule does not alter the collection of information

previously reviewed and approved by the Office of Management and

Budget, in accordance with the requirements of the Paperwork Reduction

Act (44 U.S.C. 3507) under control number 1535-0091. The principal

purpose of the proposed rule

[[Page 39233]]

is to make the SLGS securities program more attractive and flexible for

investors. The revision would not impose a new collection of

information requirement.

List of Subjects in 31 CFR Part 344

Bonds, Government securities, Securities.

Dated: July 22, 1996.

Gerald Murphy,

Fiscal Assistant Secretary.

For the reasons set forth in the preamble, part 344 of title 31 of

the Code of Federal Regulations is proposed to be revised to read as

follows:

PART 344--REGULATIONS GOVERNING UNITED STATES TREASURY CERTIFICATES

OF INDEBTEDNESS, TREASURY NOTES, AND TREASURY BONDS--STATE AND

LOCAL GOVERNMENT SERIES

Subpart A--General Information

Sec.

344.0 Offering of securities.

344.1 General provisions.

Subpart B--Time Deposit Securities

344.2 Description of securities.

344.3 Subscription for purchase.

344.4 Issue date and payment.

344.5 Redemption.

Subpart C--Demand Deposit Securities

344.6 Description of securities.

344.7 Subscription for purchase.

344.8 Issue date and payment.

344.9 Redemption.

Subpart D--Special Zero Interest Securities

344.10 General.

344.11 Redemption.

Appendix A to Part 344--Early Redemption Market Charge Formulas and

Examples for Subscription from September 1, 1989, through [date of

publication of final rule]

Appendix B to Part 344--Formula for Determining Redemption Value

for Securities Purchased and Early-Redeemed After [date of publication

of final rule]

Authority: 26 U.S.C. 141 note; 31 U.S.C. 3102 et seq.,

Subpart A--General Information

Sec. 344.0 Offering of securities.

(a) In order to provide issuers of tax exempt securities with

investments which allow them to comply with yield restriction and

arbitrage rebate provisions of the Internal Revenue Code, the Secretary

of the Treasury offers for sale the following State and Local

Government Series securities:

(1) Time deposit securities:

(i) United States Treasury Certificates of Indebtedness;

(ii) United States Treasury Notes; and

(iii) United States Treasury Bonds.

(2) Demand deposit securities--United States Treasury Certificates

of Indebtedness.

(b) As appropriate, the definitions of terms used in part 344 are

those found in the relevant portions of the Internal Revenue Code and

the tax regulations. The term ``government body'' refers to issuers of

state or local government bonds described in section 103 of the

Internal Revenue Code.

(c) The securities in paragraph (a) of this section will be issued

in a minimum amount of $1,000, or in any larger amount in increments of

not less than $1.00 for time deposit securities and in any increments

over the $1,000 minimum for demand deposit securities above the stated

minimum.

(d) This offering will continue until terminated by the Secretary

of the Treasury.

Sec. 344.1 General provisions.

(a) Regulations. United States Treasury securities--State and Local

Government Series shall be subject to the general regulations with

respect to United States securities, which are set forth in the

Department of the Treasury Circular No. 300 (31 CFR part 306), to the

extent applicable. Copies of the circular may be obtained from the

Bureau of the Public Debt, Division of Special Investments--Room 309,

200 Third Street, P.O. Box 396, Parkersburg, WV 26102-0396, or a

Federal Reserve Bank or Branch.

(b) Issuance. The securities will be issued in book-entry form on

the books of the Department of the Treasury, Bureau of the Public Debt,

Parkersburg, WV. Transfer of securities by sale, exchange, assignment,

pledge, or otherwise is not permitted.

(c) Transfers. Securities held in an account of any one type, i.e.,

time deposit, demand deposit, or special zero interest, may not be

transferred within that account or to an account of any other type.

(d) Fiscal agents. Selected Federal Reserve Banks and Branches, as

fiscal agents of the United States, may be designated to perform such

services as may be requested of them by the Secretary of the Treasury

in connection with the purchase of, transactions involving, and

redemption of, the securities.

(e) Authority of subscriber. Where a commercial bank submits an

initial or final subscription on behalf of a government body, it must

certify it is acting under the latter's specific authorization.

Ordinarily, evidence of such authority will not be required.

Subscriptions submitted by an agent other than a commercial bank must

be accompanied by evidence of the agent's authority to act. Such

evidence must describe the nature and scope of the agent's

authorization, must specify the legal authority under which the agent

was designated, and must relate by its terms to the investment action

being undertaken. Subscriptions unsupported by such evidence will not

be accepted.

(f) Reservations. Transaction requests, including requests for

subscription and redemption, will not be accepted if unsigned,

inappropriately completed, or not timely submitted. Any of these

actions shall be final. The authority of the Secretary to waive

regulations under 31 CFR 306.126 applies to part 344. The Secretary of

the Treasury reserves the right:

(1) To reject any application for the purchase of securities under

this offering;

(2) To refuse to issue any such securities in any case or any

class(es) of cases; and

(3) To revoke the issuance of any security, and to declare the

subscriber ineligible thereafter to subscribe for securities under this

offering, if:

(i) Any security is issued on the basis of an improper

certification or other misrepresentation by the subscriber (other than

as the result of an inadvertent error),

(ii) The issuance of any security is in conjunction with a

violation of the tax regulations, as determined by the Internal Revenue

Service or

(iii) The Secretary deems such action to be in the public interest.

(g) Debt limit contingency. The Department of the Treasury reserves

the right to change or suspend the terms and conditions of this

offering, including provisions relating to subscriptions for, and

issuance of, securities, interest payments, redemptions, and rollovers,

as well as notices relating hereto, at any time the Secretary

determines that issuance of obligations sufficient to conduct the

orderly financing operations of the United States cannot be made

without exceeding the statutory debt limit. Announcement of such

changes shall be provided by such means as the Secretary deems

appropriate.

(h) Noncompliance. The penalty imposed on any government body which

fails to make settlement on a subscription once submitted and not

canceled timely shall be to render the government body ineligible

thereafter to subscribe for securities under any offering in part 344

for a period of six

[[Page 39234]]

months, beginning on the date the subscription is withdrawn or the

proposed issue date, whichever occurs first. The Division of Special

Investments may determine to waive the six-month penalty, pursuant to

the provisions governing the waiver of regulations set forth under 31

CFR 306.126. Where settlement occurs after the proposed issue date and

the Division of Special Investments determines, pursuant to 31 CFR

306.126, that settlement is acceptable on an exception basis, the six-

month penalty will be waived and the government body shall be subject

to a late payment assessment. The late payment assessment will equal

the amount of interest that would have accrued on the securities from

the proposed issue date to the date of settlement, as well as an

administrative fee of $100 per subscription. Assessments of late

payment fees and administrative fees under part 344 are due on demand.

(i) General redemption provisions. A security may not be called for

redemption by the Secretary of the Treasury prior to maturity. Upon the

maturity of a security, the Department will make payment of the

principal amount and interest due to the owner thereof. A security

scheduled for redemption on a non-business day will be redeemed on the

next business day.

(j) Unless otherwise noted, any reference herein to days refers to

calendar days.

Subpart B--Time Deposit Securities

Sec. 344.2 Description of securities.

(a) Terms. (1) Certificates will be issued with maturity periods

fixed by the government body, from thirty days up to and including one

year, or for any intervening period; provided, for certificates that

bear no interest, the maturity period may be fixed by the government

body from fifteen days up to and including one year or for any

intervening period.

(2) Notes. The notes will be issued with maturity periods fixed by

the government body, from one year and one day up to and including ten

years, or for any intervening period.

(3) Bonds. The bonds will be issued with maturity periods fixed by

the government body, from ten years and one day up to and including

thirty years, or for any intervening period.

(b) Interest rate. Each security shall bear such rate of interest

as the government body shall designate, but the rate shall not exceed

the maximum interest rate. The applicable maximum interest rates for

each day shall equal rates shown in a SLGS securities rate table, which

will be released by the Department to the public by 10:00 a.m., Eastern

time, each business day. If the Department finds that due to

circumstances beyond its control the rates will not be available to the

public by 10:00 a.m., Eastern time, on any given business day, the

applicable interest for the last preceding business day shall apply.

The applicable rate table for any subscription is the one in effect on

the date the initial subscription is received at Public Debt.

Subscriptions received on a non-business day will be subject to those

interest rates which are in effect for the next business day. The rates

specified in the tables are five basis points below the then current

estimated Treasury borrowing rate for a Treasury security of comparable

maturity and may be found by investors in the Commerce Department's

Economic Bulletin Board or may be obtained from the Division of Special

Investment's automated fax at (304)480-7548 or by calling (304) 480-

7752.

(c) Payment. (1) Interest computation and payment dates. Interest

on a certificate will be computed on an annual basis and will be paid

at maturity with the principal. Interest on a note or bond will be paid

semi-annually. The government body will specify the first interest

payment date, which must occur any time between thirty days and one

year of the date of issue, and the final interest payment date must

coincide with the maturity date of the security. Interest for other

than a full semi-annual interest period is computed on the basis of a

365-day or 366-day year (for certificates) and on the basis of the

exact number of days in the half-year (for notes and bonds). See

appendix to subpart E of Part 306 of this chapter for rules regarding

computation of interest.

(2) Method of payment. Payment may be made by the Automated

Clearing House method (ACH) for the owner's account at a financial

institution designated by the owner. Redemptions prior to maturity will

be paid by Fedwire. To the extent applicable, provisions of Sec. 357.26

on ``Payments,'' as set forth in 31 CFR part 357 and provisions of 31

CFR part 370, shall govern ACH payments made under this offering. The

Department of the Treasury may employ alternate payment procedures,

instead of ACH, in any case, or class of cases where operational

considerations necessitate such action.

Sec. 344.3 Subscription for purchase.

(a) Subscription requirements. Subscriptions for purchase of

securities under this offering must be submitted to the Division of

Special Investments, Bureau of the Public Debt, 200 Third Street, P.O.

Box 396, Parkersburg, WV 26102-0396. Initial and final subscriptions

may be submitted by fax at (304) 480-6818, by mail, or by other

carrier. All subscriptions submitted by mail, whether initial or final,

should be sent by certified or registered mail.

(b) Initial subscriptions. (1) An initial subscription, either on a

designated Treasury form or in letter form, stating the principal

amount to be invested and the issue date, must be received by Public

Debt at least five days before the issue date for subscriptions of $10

million or less, and at least seven days before the issue date for

subscriptions of over $10 million, but in no event will subscriptions

be received more than 60 days prior to issue date. Subscriptions may be

sent by facsimile transfer (fax) on (304) 480-6818, carrier service,

U.S. Postal Service or other means. If the subscription is faxed, the

original document must be received by Public Debt no later than the

issue date. Initial subscriptions of $10 million or less may be

canceled without penalty by the subscriber prior to the close of

business on the fifth day before issue date. If the fifth day before

issue date falls on a non-business day, the cancellation must occur on

the preceding business day. Subscriptions of more than $10 million may

be canceled without penalty by the subscriber prior to the close of

business of the seventh day before issue date. For example, if

securities totaling $10 million or less are to be issued on March 16,

the initial subscription must be received by Public Debt no later than

March 11. If securities totaling more than $10 million are to be issued

on March 16, the initial subscription must be received by Public Debt

no later than March 9. If the initial subscription is in letter form,

it must contain the Tax Identification Number of the government body or

it will not be accepted. It should read substantially as follows:

To: Bureau of the Public Debt

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

Pursuant to the provisions of Department of the Treasury

Circular, Public Debt Series No. 3-72, current revision, the

undersigned hereby subscribes for United States Treasury Time

Deposit Securities--State and Local Government Series, to be issued

as entries on the books of the Bureau of the Public Debt, Department

of the Treasury, in the total amount and with the issue date shown

below, which date is at least five/seven days after the date of this

subscription:

Principal Amount $-----------------------------------------------------

Issue Date-------------------------------------------------------------

[[Page 39235]]

The undersigned agrees the final subscription and payment will

be submitted on or before the issue date.

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

(Tax I.D. Number of state or local government body eligible to

purchase State and Local Government Series securities)

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

(Name of state or local government body eligible to purchase State

and Local Government Series securities)

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

(Date)

by---------------------------------------------------------------------

(Signature and Title)

(2) The provisions set out in paragraph (e) of Sec. 344.1, dealing

with the authority of the subscriber to act on behalf of a government

body, and in Sec. 344.1(h), relating to the failure to complete a

subscription, apply to initial, as well as final, subscriptions.

(3) An initial subscription may be amended on or before the issue

date, but no later than 3:00 p.m., Eastern time, on the issue date.

Notification may be faxed to the Bureau of the Public Debt at (304)

480-6818 provided the request is clearly identified as an amendment and

is immediately followed by the submission, by mail or other carrier, of

written notification. Amendments to initial subscriptions are

acceptable with the following exceptions:

(i) The issue date may not be changed to require issuance earlier

than the issue date originally specified or to require issuance more

than seven days later than originally specified. If such change is

made, notification should be provided to the Bureau of the Public Debt

as soon as possible, but no later than 3:00 p.m., Eastern time, one

business day before the originally specified issue date;

(ii) The aggregate amount may not be changed by more than the ten

percent limitation set out in paragraph (c) of this section;

(iii) An interest rate may not be changed to a rate that exceeds

the maximum interest rate in the table that was in effect for a

security of comparable maturity on the date the initial subscription

was submitted; and

(iv) Where an amendment is not submitted timely, the Division of

Special Investments may determine, pursuant to the provisions governing

waiver of regulations set forth under 31 CFR 306.126, that such an

amendment is acceptable on an exception basis. Where an amendment is

determined to be acceptable on an exception basis, the amended

information shall be used as the basis for issuing the securities, and

an administrative fee of $100 per subscription will be assessed. This

administrative fee is due on demand as provided for in Sec. 344.1(h).

The Secretary reserves the right to reject amendments which are not

submitted timely.

(4) No initial subscription will be required where a final

subscription is received at least five days before the issue date for

subscriptions of $10 million or less and at least seven days before the

issue date for subscriptions over $10 million. Such final subscription

will be treated as the initial subscription for purposes of determining

the applicable interest rate table (see Sec. 344.2(b)), and may be

amended on or before the issue date, subject to the exceptions in

paragraph (b)(3) of this section.

(c) Final subscriptions. A final subscription must be received by

the Bureau of the Public Debt on or before the issue date, but no later

than 3:00 p.m., Eastern time, on the issue date. The final subscription

may be faxed to the Bureau of the Public Debt at (304) 480-6818,

provided the fax is properly identified as a final subscription and is

immediately followed by the submission of the original subscription

form by mail or other carrier. The final subscription must be for a

total principal amount that is no more than ten percent above or below

the aggregate principal amount specified in the initial subscription.

The final subscription, dated and signed by an official authorized to

make the purchase and showing the taxpayer identification number of the

government body, must be accompanied by a copy of the initial

subscription, where applicable. The various maturities, interest rates,

and interest payment dates (in the case of notes and bonds), must be

specified in the final subscription, as well as the title(s) of the

designated official(s) authorized to request early redemption. Final

subscriptions submitted for certificates, notes and bonds must

separately itemize securities of each maturity and each interest rate.

The final subscription must contain a statement by the subscriber that

none of the proceeds submitted in payment is derived (directly or

indirectly) from the redemption before maturity of other securities of

the State and Local Government Series purchased on or before December

27, 1976.

Sec. 344.4 Issue date and payment.

The subscriber shall fix the issue date of each security in the

initial subscription. The issue date must be a business day and may not

exceed by more than sixty days the date the initial subscription was

received by Public Debt. Full payment for each subscription must be

submitted by the Fedwire funds transfer system with credit directed to

the Treasury's General Account. Full payment should be submitted by

3:00 p.m., Eastern time, to ensure that settlement on the securities

occurs on the date of issue.

Sec. 344.5 Redemption.

(a) Redemption before maturity--(1) In general. A security may be

redeemed at the owner's option no earlier than twenty-five days after

the issue date in the case of a certificate of thirty days or more, no

earlier than fifteen days before the scheduled maturity for zero

interest certificates of fifteen to twenty-nine days duration, and no

earlier than thirty days after the issue date in the case of a note or

bond. Partial redemptions may be requested in any amount; however, an

account balance of less than $1,000 will be redeemed in total.

(2) Notice. Notice of redemption prior to maturity must be

submitted, either on a designated Treasury form or by letter, by the

official(s) authorized to redeem the securities, as shown on the final

subscription form, to the Division of Special Investments, Bureau of

the Public Debt, 200 Third Street, P.O. Box 396, Parkersburg, WV 26102-

0396. The notice may be submitted by fax to the Bureau of the Public

Debt at (304) 480-6818, by mail or by other carrier. The notice must be

received by Public Debt no less than ten days before the requested

redemption date, but no more than sixty days before the requested

redemption date. The notice must show the account number, the

maturities of the securities to be redeemed, and the Tax Identification

Number of the government body. A notice of redemption prior to maturity

may not be canceled.

(3) Redemption proceeds--Subscriptions on or after [date of

publication of final rule]. For securities subscribed for on or after

[date of publication of final rule], the amount of the redemption

proceeds is calculated as follows:

(i) Interest. If a security is redeemed before maturity on a date

other than a scheduled interest payment date, interest will be paid for

the fractional interest period since the last interest payment date.

(ii) Redemption value. The remaining interest and principal

payments are discounted by the current Treasury borrowing rate for the

remaining term to maturity of the security being redeemed. This does

not apply to SLGS securities purchased before [date of publication of

final rule]. The term ``current Treasury borrowing rate'' is determined

in accordance with Sec. 344.2(b). The formulas for calculating the

redemption value under this section are set forth in

[[Page 39236]]

Appendix B of this part. Redemption proceeds in the case of a zero-

interest security are a return of the principal invested.

(4) Redemption proceeds--Subscriptions from September 1, 1989,

through [date one day prior to publication date of final rule]. For

securities subscribed for from September 1, 1989, through [date one day

prior to publication date of final rule], the amount of the redemption

proceeds is calculated as follows:

(i) Interest. If a security is redeemed before maturity on a date

other than a scheduled interest payment date, interest will be paid for

the fractional interest period since the last interest payment date.

(ii) Market charge. An amount shall be deducted from the redemption

proceeds in all cases where the current borrowing rate of the

Department of the Treasury for the remaining period to original

maturity of the security prematurely redeemed exceeds the rate of

interest originally fixed for such security. The amount shall be the

present value of the future increased borrowing cost to the Treasury.

The annual increased borrowing cost for each interest period is

determined by multiplying the principal by the difference between the

two rates. For notes and bonds, the increased borrowing cost for each

remaining interest period to original maturity is determined by

dividing the annual cost by two. For certificates, the increased

borrowing cost for the remaining period to original maturity is

determined by multiplying the annual cost by the number of days

remaining until original maturity divided by the number of days in the

calendar year. Present value shall be determined by using the current

Treasury borrowing rate as the discount factor. The term ``current

Treasury borrowing rate'' means the applicable rate shown in the table

of maximum interest rates payable on United States Treasury

securities--State and Local Government Series--for the day the request

for early redemption is received by Public Debt, plus \1/8\ of 1

percentage point. Where redemption is requested as of a date less than

thirty days before the original maturity date, such applicable rate is

the rate shown for a security with a maturity of thirty days. The

market charge for bonds, notes, and certificates of indebtedness can be

computed by use of the formulas in Appendix A to this part.

(5) Redemption proceeds--Subscriptions from December 28, 1976,

through August 31, 1989. For securities subscribed for from December

28, 1976, through August 31, 1989, the amount of the redemption

proceeds is calculated as follows:

(i) Interest. Interest for the entire period the security was

outstanding shall be recalculated on the basis of the lesser of the

original interest rate at which the security was issued, or the

interest rate that would have been set at the time of the initial

subscription had the term for the security been for the shorter period.

If a note or bond is redeemed before maturity on a date other than a

scheduled interest payment date, no interest will be paid for the

fractional interest period since the last interest payment date.

(ii) Overpayment of interest. If there have been overpayments of

interest, as determined under paragraph (b)(5)(i) of this section,

there shall be deducted from the redemption proceeds the aggregate

amount of such overpayments, plus interest, compounded semi-annually,

thereon from the date of each overpayment to the date of redemption.

The interest rate to be used in calculating the interest on the

overpayment shall be one-eighth of one percent above the maximum rate

that would have applied to the initial subscription had the term of the

security been for the shorter period.

(iii) Market charge. An amount shall be deducted from the

redemption proceeds in all cases where the current borrowing rate of

the Department of the Treasury for the remaining period to original

maturity of the security prematurely redeemed exceeds the rate of

interest originally fixed for such security. The amount shall be

calculated using the formula in paragraph (b)(4)(ii) of this section.

(6) Redemption proceeds--Subscriptions on or before December 27,

1976. (i) For securities subscribed for on or before December 27, 1976,

the amount of the redemption proceeds is calculated as follows.

(ii) The interest for the entire period the security was

outstanding shall be recalculated on the basis of the lesser of the

original interest rate at which the security was issued, or an adjusted

interest rate reflecting both the shorter period during which the

security was actually outstanding and a penalty. The adjusted interest

rate is the Treasury rate which would have been in effect on the date

of issuance for a marketable Treasury certificate, note, or bond

maturing on the quarterly maturity date prior to redemption (in the

case of certificates), or on the semi-annual maturity period prior to

redemption (in the case of notes and bonds), reduced in either case by

a penalty which shall be the lesser of:

(A) One-eighth of one percent times the number of months from the

date of issuance to original maturity, divided by the number of full

months elapsed from the date of issue to redemption; or

(B) One-fourth of one percent.

(iii) There shall be deducted from the redemption proceeds, if

necessary, any overpayment of interest resulting from previous payments

made at a higher rate based on the original longer period to maturity.

(b) [Reserved]

Subpart C--Demand Deposit Securities

Sec. 344.6 Description of securities.

(a) Terms. The securities are defined as one-day certificates of

indebtedness. Each subscription will be established as a unique

account. Securities will be automatically rolled over each day unless

redemption is requested.

(b) Interest rate. (1) Each security shall bear a variable rate of

interest based on an adjustment of the average yield for three-month

Treasury bills at the most recent auction. A new rate will be effective

on the first business day following the regular auction of three-month

Treasury bills and will be shown in a SLGS securities rate table,

available to the public on such business day. Interest will be accrued

and added to principal daily. Interest will be computed on the balance

of the principal, plus interest accrued through the immediately

preceding day.

(2)(i) The annualized effective demand deposit rate in decimals,

designated ``I'' in Equation 1 is calculated as:

[GRAPHIC] [TIFF OMITTED] TP26JY96.002

where:

P=Average auction price for the most recently auctioned 13-week

Treasury bill, per hundred, to three decimals.

Y=365 if the year following issue date does not contain a leap year day

and 366 if it does contain a leap year day.

DTM=The number of days from date of issue to maturity for the most

recently auctioned 13-week Treasury bill.

MTR=Estimated marginal tax rate, in decimals, of purchasers of short-

term tax-exempt bonds.

TAC=Treasury administrative costs, in decimals.

[[Page 39237]]

(ii) The daily factor for the demand deposit rate is then

calculated as follows:

[GRAPHIC] [TIFF OMITTED] TP26JY96.003

(3) Information as to the estimated average marginal tax rate and

costs for administering the demand deposit State and Local Government

Series securities program, both to be determined by Treasury from time

to time, will be published in the Federal Register.

(c) Payment. Interest earned on the securities will be added to the

principal and will be reinvested daily until redemption. At any time

the Secretary determines that issuance of obligations sufficient to

conduct the orderly financing operations of the United States cannot be

made without exceeding the statutory debt limit, the Department will

invest any unredeemed demand deposit securities in special ninety-day

certificates of indebtedness. These ninety-day certificates will be

payable at maturity, but redeemable before maturity, provided funds are

available for redemption, or reinvested in demand deposit securities

when regular Treasury borrowing operations resume, both at the owner's

option. Funds invested in the ninety-day certificates of indebtedness

will earn simple interest equal to the daily factor in effect at the

time demand deposit security issuance is suspended, multiplied by the

number of days outstanding.

Sec. 344.7 Subscription for purchase.

(a) Subscription requirements. Subscriptions for purchase of

securities under this offering must be submitted to the Division of

Special Investments, Bureau of the Public Debt, 200 Third Street, P.O.

Box 396, Parkersburg, WV 26102-0396. Subscriptions must be submitted on

a designated Treasury form, must specify the principal amount to be

invested and the issue date, and must be signed by an official

authorized to make the purchase. The Bureau of the Public Debt must

receive the subscription at least five business days before the issue

date for subscriptions of $10 million or less and at least seven

business days before the issue date for subscriptions of more than $10

million. Subscriptions for more than $10 million can be canceled

without penalty up to seven days prior to the issue date. Subscriptions

for $10 million or less may be canceled without penalty up to five days

prior to the issue date. The subscription may be submitted by fax at

(304) 480-6818, by certified or registered mail, or by other carrier.

If faxed, the original subscription form must be received by the

Division of Special Investments by 3:00 p.m., Eastern time, on the

issue date. Public Debt will not accept subscriptions for demand

deposit securities more than 60 days prior to the issue date.

(b) Amending subscriptions. The principal amount to be invested may

be changed without penalty on or before the issue date, but no later

than 1:00 p.m. Eastern time, on the issue date. The request must be

clearly identified as an amendment and must be followed immediately by

the submission, by mail or other carrier, of written notification.

Where an amendment is not submitted timely, the Division of Special

Investments may determine, pursuant to the provisions governing waiver

of regulations set forth under 31 CFR 306.126, that such an amendment

is acceptable on an exception basis. Where an amendment is determined

to be acceptable on an exception basis, the amended information shall

be used as the basis for issuing the securities, and an administrative

fee of $100 per subscription will be assessed. This administrative fee

is due on demand as provided for in Sec. 344.1(h). The Secretary

reserves the right to reject amendments which are not submitted timely.

Sec. 344.8 Issue date and payment.

The subscriber shall fix the issue date on the subscription, the

issue date to be a business day at least five business days after

receipt of the subscription by the Division of Special Investments for

subscriptions of $10 million or less and seven business days after

receipt of the subscription by the Division of Special Investments for

subscriptions more than $10 million. Full payment for each subscription

must be submitted by the Fedwire funds transfer system with credit

directed to the Treasury's General Account. Full payment should be

received by the Division of Special Investments by 3:00 p.m., Eastern

time, to ensure that settlement on the securities occurs on the issue

date.

Sec. 344.9 Redemption.

(a) General. A security may be redeemed at the owner's option,

provided a request for redemption is received not less than one

business day prior to the requested redemption date for redemptions of

$10 million or less and received not less than three business days for

redemptions of more than $10 million. Partial redemptions may be

requested in any amount; however, an account balance of less than

$1,000 will be redeemed in total. Payment will be made by Fedwire.

(b) Notice. Notice of redemption must be submitted, either on a

designated Treasury form or by letter, by the official(s) authorized to

redeem the securities, as shown on the subscription form, to the

Division of Special Investments, Bureau of the Public Debt, 200 Third

Street, P.O. Box 396, Parkersburg, WV 26102-0396. The notice may be

submitted by fax to the Bureau of the Public Debt at (304) 480-6818, by

mail, or by other carrier. The notice must show the account number and

the Tax Identification Number of the government body. The notice of

redemption must be received at the Bureau of the Public Debt by 1:00

p.m., Eastern time on the required day.

Subpart D--Special Zero Interest Securities

Sec. 344.10 General.

Provisions of subpart B of this part (Time Deposit Securities)

apply except as specified in subpart D of this part. Special zero

interest securities will no longer be issued after [date of publication

of final rule]. All zero interest securities issued after [date of

publication of final rule] are zero interest time deposit securities,

subject to the rules of subpart B of this part.

Sec. 344.11 Redemption.

(a) General. Provisions of Sec. 344.5(a) apply.

(b) Before maturity. (1) In general. A security may be redeemed at

the owner's option no earlier than twenty-five days after the issue

date in the case of a certificate and thirty days after the issue date

in the case of a note. No market charge or penalty shall apply in the

case of the redemption of a special zero interest security before

maturity.

(2) Notice. Notice of redemption prior to maturity must be

submitted, either on a designated Treasury form or by letter, by the

official(s) authorized to redeem the securities, as shown on the final

subscription form, to the Division of Special Investments, Bureau of

the Public Debt, 200 Third Street, P.O. Box 396, Parkersburg, WV 26102-

0396. The notice may be submitted by fax to the Bureau of the Public

Debt at (304) 480-6818, by mail, or by other carrier. The notice must

show the account number, the maturities of the securities to be

redeemed, and the Tax Identification Number of the government body. The

notice must be received by Public Debt no less than fifteen days before

the requested redemption date, but no more than sixty days before the

requested redemption date. A notice of redemption prior to maturity

cannot be canceled.

[[Page 39238]]

Appendix A to Part 344--Early Redemption Market Change Formulas and

Examples for subscriptions from September 1, 1989, through [date of

publication of final rule]

A. The amount of the market charge for bonds and notes issued

before (date of publication of final rule) can be determined by the

following formula:

[GRAPHIC] [TIFF OMITTED] TP26JY96.004

where:

M=Market charge

b=increased annual borrowing cost (i.e., principal multiplied by the

excess current borrowing rate for the period from redemption to

original maturity of note or bond over the rate for the security)

r=number of days from redemption date to next interest payment date

s=number of days in current semi-annual period

i=Treasury borrowing rate over the remaining term to maturity, based on

semi-annual interest payments and expressed in decimals.

n=number of remaining full semi-annual periods from the redemption date

to the original maturity date, except that if the redemption date is on

an interest payment date, n will be one less than the number of full

semi-annual periods remaining to maturity.

[GRAPHIC] [TIFF OMITTED] TP26JY96.005

B. The application of this formula may be illustrated by the

following example:

(1) Assume that a $600,000 note is issued on July 1, 1985, to

mature on July 1, 1995. Interest is payable at a rate of 8% on January

1 and July 1.

(2) Assume that the note is redeemed on February 1, 1989, and that

the current borrowing rate for Treasury at that time for the remaining

period of 6 years and 150 days is 11%.

(3) The increased annual borrowing cost is $18,000.

($600,000) x (11%-8%)

(4) The market charge is computed as follows:

[GRAPHIC] [TIFF OMITTED] TP26JY96.006

[[Page 39239]]

[GRAPHIC] [TIFF OMITTED] TP26JY96.007

C. The amount of the market charge for certificates issued before

[date of publication of final rule] can be determined through use of

the following formula:

[GRAPHIC] [TIFF OMITTED] TP26JY96.008

where:

M=market charge

b=increased borrowing cost for full period

r=number of days from redemption date to original maturity date

s=number of days in current annual period (365 or 366)

i=current borrowing rate expressed in decimals (discount factor)

D. The application of this formula may be illustrated by the

following example:

(1) Assume that a $50,000 certificate is issued on March 1, 1987,

to mature on November 1, 1987. Interest is payable at a rate of 10%.

(2) Assume that the certificate is redeemed on July 1, 1987, and

that the current borrowing cost to Treasury for the 123-day period from

July 1, 1987, to November 1, 1987, is 11.8%.

(3) The increased annual borrowing cost is $900.

($50,000) x (11.8%-10%)

(4) The market charge is computed as follows:

[[Page 39240]]

[GRAPHIC] [TIFF OMITTED] TP26JY96.009

Appendix B to Part 344--Formula for Determining Redemption Value

for Securities Purchased and Early-Redeemed After [date of publication

of final rule]

The total redemption value for bonds and notes can be determined by

the following two steps:

First, accrued interest payable in accordance with Section

344.5(a)(3)(i) is calculated using the following formula:

[GRAPHIC] [TIFF OMITTED] TP26JY96.010

and secondly, the redemption value per Sec. 344.5(a)(3)(ii) is

calculated using the following equation:

[GRAPHIC] [TIFF OMITTED] TP26JY96.011

where:

RV=Redemption value per $100 principal

AI=Accrued interest=[(s-r)/s] x (C/2)

r=Number of days from redemption date to next interest payment date

s=number of days in current semi-annual period

i=Treasury borrowing rate over the remaining term to maturity, based on

semi-annual interest payments and expressed in decimals

C=the regular annual interest per $100 principal

n=number of remaining full semi-annual periods from the redemption date

to the original maturity date, except that, if the redemption date is

an interest payment date, n will be one less than the number of full

semi-annual periods remaining to maturity.

vn=1/(1+i/2)n=present value of 1 due at the end of n periods

an=(1 - vn)/(i/2)=v + v2 + v3 + ... +

vn=present value of 1 per period for n periods

[FR Doc. 96-19040 Filed 7-23-96; 3:03 pm]

BILLING CODE 4810-39-P