Sale and Issue of Marketable Book-Entry Treasury Bills, Notes, and Bonds (Department of the Treasury Circular, Public Debt Series No. 1-93)

DEPARTMENT OF THE TREASURY

Fiscal Service

31 CFR Part 356

Sale and Issue of Marketable Book-Entry Treasury Bills, Notes,

and Bonds (Department of the Treasury Circular, Public Debt Series No.

1-93)

AGENCY: Bureau of the Public Debt, Fiscal Service, Department of the

Treasury.

ACTION: Final rule.

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

``Department'') is issuing in final form an amendment to 31 CFR Part

356 (Uniform Offering Circular for the Sale and Issue of Marketable

Book-Entry Treasury Bills, Notes, and Bonds). This amendment includes

changes necessary to make fungible stripped interest components for

Treasury inflation-indexed securities, which the Department began

issuing in January 1997. In addition, the amendment makes certain

technical clarifications and conforming changes.

EFFECTIVE DATE: March 31, 1999.

ADDRESSES: This final rule is available for downloading from the Bureau

of the Public Debt's Internet site at the following address:

www.publicdebt.treas.gov. It is also available for public inspection

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

5030, Main Treasury Building, 1500 Pennsylvania Avenue, N.W.,

Washington, D.C., 20220. Persons wishing to visit the library should

call (202) 622-0990 for an appointment.

FOR FURTHER INFORMATION CONTACT: Kerry Lanham (Acting Director), Chuck

Andreatta or Kurt Eidemiller (Government Securities Specialists),

Bureau of the Public Debt, Government Securities Regulations Staff,

(202) 219-3632.

SUPPLEMENTARY INFORMATION:

I. Background

The Uniform Offering Circular (31 CFR Part 356) sets out the terms

and conditions for the sale and issuance by the Department of the

Treasury to the public of marketable Treasury bills, notes, and bonds.

The Uniform Offering Circular, in conjunction with offering

announcements, represents a comprehensive statement of those terms and

conditions.1

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\1\ The Uniform Offering Circular was published as a final rule

on January 5, 1993 (58 FR 412). The circular, as amended, is

codified at 31 CFR Part 356.

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In January 1997, the Department began issuing a new type of

marketable security, referred to as a Treasury inflation-indexed

security, whose principal value is adjusted for inflation as measured

by the Bureau of Labor Statistics of the U.S. Department of

Labor.2 The Department believes the issuance of these new

securities will reduce interest costs to the Treasury over the long

term and broaden the types of debt instruments available to investors

in U.S. financial markets.

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\2\ 62 FR 846 (January 6, 1997).

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Treasury inflation-indexed securities have been eligible for the

STRIPS (Separate Trading of Registered Interest and Principal of

Securities) program since Treasury began issuing the new securities.

STRIPS is the Department's program under which eligible securities are

authorized to be separated into principal and interest components

(interest components are also referred to as ``TINTS''). Such

components are maintained in book-entry accounts, and transferred

separately in the Treasury/Reserve Automated Debt Entry System

(``TRADES'' or the commercial book-entry system). Unlike TINTS from

Treasury fixed-principal securities, TINTS stripped from an inflation-

indexed security are currently not fungible (i.e., they are not

interchangeable) with TINTS stripped from a different inflation-indexed

security, even if the components have the same maturity (payment)

date.3

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\3\ See 31 CFR 356.31(f).

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In the preamble to the final rule amendments to accommodate the

issuance of inflation-indexed securities, the Department stated that it

would ``continue to work on making interest components fungible in a

manner that is operationally feasible.'' 4 The Department

recognizes that making stripped inflation-indexed interest components

fungible is important to developing a liquid market for these

components. The Department has worked with market participants to

develop a methodology that will accomplish this goal.

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\4\ 62 FR 846, 848 (January 6, 1997).

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The Department published for public comment a proposed amendment to

the Uniform Offering Circular on December 8, 1997,5 which

laid out the proposed methodology for making TINTS stripped from

different Treasury inflation-indexed securities fungible. The closing

date for comments was February 6, 1998. As explained in more detail

below, after considering the comments provided, Treasury has decided to

adopt the proposed methodology for making TINTS stripped from different

inflation-indexed securities fungible. This methodology will remain

unchanged from its description in the proposed rule. However, in order

to provide market participants sufficient time to make any necessary

automated systems changes, the effective date of this final rule will

be delayed until March 31, 1999.

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\5\ 62 FR 64528 (December 8, 1997).

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II. Comments Received in Response to the Proposed Rule

The Department received one comment letter on the proposed rule,

which was from The Bond Market Association

(``Association'').6 In developing the final rule, the

Department took the issues raised in this comment letter into

consideration, as well as input received during discussions with

various active Treasury securities market participants.

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\6\ See letter from Ms. Paula H. Simpkins, Vice President and

Assistant General Counsel, The Bond Market Association (dated

February 6, 1998). This letter is available to the public for

inspection and downloading on the Internet, at the address provided

earlier in this rule, and for inspection and copying at the Treasury

Department Library, at the address provided earlier.

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The Association generally supported the Department's efforts to

make TINTS of inflation-indexed securities fungible. The Association,

however, cited its members' concern with ``the significant

modifications needed for their operational systems to accommodate the

trading and maintenance of the adjusted value of stripped interest

components to the penny.'' The Association said its members believe

``that it will require approximately six to nine months to both make

and test the appropriate system changes before they can begin trading

the new stripped securities.'' Association members, the commenter said,

also expressed concerns that these system changes could complicate

efforts already underway to make operational system adjustments to

prepare for the year 2000, the European Monetary Unit and the General

Collateral Finance Repo product of the Government Securities Clearing

Corporation. Similar concerns were expressed to the Department in

discussions with various active Treasury market participants. The

Association suggested that Treasury consider truncating the pennies

from the adjusted values, so that the adjusted values would be

maintained in accounts and transferred in whole dollars.

The Association supported establishing a conversion factor between

securities issued under different CPI base reference periods if the

Consumer Price Index's base reference period is changed. Such a factor

would enable TINTS from inflation-indexed securities issued during

different CPI base

[[Page 35783]]

reference periods to be fungible. However, the Association recommended

that the conversion be done on a voluntary basis so investors could

decide whether the benefits outweigh the associated costs of

conversion. The Association also recommended the creation of an

additional conversion factor that would allow TINTS of inflation-

indexed securities issued during a more-recent base period to be

converted to an older base period. This additional convertibility, the

commenter asserted, would further increase the marketability of the

TINTS.

After taking the comments and views received into consideration,

the Department is issuing a final rule that adopts the proposed rule

without any significant changes. The suggestion to truncate the pennies

from the calculation of adjusted values was not adopted because of the

resulting payment differences to holders of inflation-indexed TINTS as

compared with holders of unstripped inflation-indexed securities,

particularly for smaller holders. However, in order to provide market

participants with sufficient time to make any automated systems changes

necessary for maintaining accounts and transferring adjusted values in

pennies, Treasury has decided to adopt the recommendation of The Bond

Market Association to delay the effective date. Accordingly, the

effective date of this final rule will be delayed until March 31, 1999.

In delaying the effective date, the Department recognizes the

significant efforts of market participants in making systems changes

for the year 2000 and the European Monetary Unit.

No changes are being proposed at this time to the current STRIPS

program for fixed-principal securities. However, as stated in the

preamble to the proposed rule, the Department will consider at a later

date the desirability of making changes to the minimum and multiple

requirements for fixed-principal TINTS similar to the requirements for

inflation-indexed TINTS, i.e., discontinuing the $1,000 minimum-to-hold

and multiple requirement, and permitting fixed-principal TINTS to be

held in amounts to the penny.

The suggestions to make conversions of adjusted values from less-

recent CPI base reference periods to more-recent base reference periods

voluntary, and to create an additional conversion factor to facilitate

conversions of adjusted values from more-recent periods to less-recent

periods, were also not adopted. The Department believes that these

suggestions, had they been adopted, would have been operationally very

complicated. They also would have continued to make inflation-indexed

TINTS not fungible to the extent that, in either case, there would have

to be different CUSIP numbers for TINTS that have the same maturity

(payment) date. The rule has been amended, therefore, so that in the

event that the CPI is rebased, conversion to the most-recent base

reference period will be mandatory. At such time, Treasury will publish

information specifying the manner in which this conversion will be

accomplished. In addition, any new TINTS created from a security that

was issued during a prior base reference period will be issued with

adjusted values calculated using reference CPIs under the most-recent

base reference period.

The only other change in the final rule from the proposed rule is

to provide for mandatory conversion to fungible TINTS of any TINTS

created prior to March 31, 1999.7 Treasury stated in the

preamble to the proposed rule that this conversion would occur because

of the Department's goal, where possible, to make all TINTS from

inflation-indexed securities fungible.8 Also as stated in

the preamble to the proposed rule, Treasury will provide public notice,

if necessary, informing participants of the effective conversion date,

along with detailed instructions regarding the conversion to fungible

STRIPS.

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\7\ As of May 31, 1998, none of the currently outstanding

inflation-indexed securities has been stripped.

\8\ 62 FR 64528, 64530 (December 8, 1997).

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III. Procedural Requirements

This final rule does not meet the criteria for a ``significant

regulatory action'' pursuant to Executive Order 12866. Although this

rule was issued initially in proposed form to secure the benefit of

public comment, the notice, public comment, and delayed effective date

provisions of the Administrative Procedure Act are inapplicable,

pursuant to 5 U.S.C. 553(a)(2).

As no notice of proposed rulemaking is required, the provisions of

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

There is no new collection of information contained in this final

rule and, therefore, the Paperwork Reduction Act does not apply. The

collections of information in 31 CFR Part 356 have been previously

approved by the Office of Management and Budget under section 3507(d)

of the Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35) under

control number 1535-0112. Under this 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.

List of Subjects in 31 CFR Part 356

Bonds, Federal Reserve System, Government securities, Reporting and

recordkeeping requirements, Securities.

For the reasons set forth in the preamble, 31 CFR Chapter II,

Subchapter B, Part 356, is amended as follows:

PART 356--SALE AND ISSUE OF MARKETABLE BOOK-ENTRY TREASURY BILLS,

NOTES, AND BONDS (DEPARTMENT OF THE TREASURY CIRCULAR, PUBLIC DEBT

SERIES NO. 1-93)

1. The authority citation for part 356 continues to read as

follows:

Authority: 5 U.S.C. 301; 31 U.S.C. 3102, et seq.; 12 U.S.C. 391.

2. Section 356.2 is amended by adding in alphabetical order the

definition of ``Adjusted value'' to read as follows:

Sec. 356.2 Definitions.

* * * * *

Adjusted value means, for an interest component stripped from an

inflation-indexed security, an amount derived by multiplying the

semiannual interest rate by the par amount and then multiplying this

value by 100 divided by the Reference CPI of the original issue date

(or dated date, when the dated date is different from the original

issue date). (See Appendix B, Section IV to this part, for an example

of how to calculate the adjusted value for interest components stripped

from an inflation-indexed security.)

* * * * *

3. Section 356.31 is revised to read as follows:

Sec. 356.31 STRIPS.

(a) General. A note or bond may be designated in the offering

announcement as eligible for the STRIPS program. At the option of the

holder, and generally at any time from its issue date until its call or

maturity, any such security may be ``stripped,'' i.e., divided into

separate principal and interest components. A short or long first

interest payment and all interest payments within a callable period are

not eligible to be stripped from the principal component. The CUSIP

numbers and payment dates for the principal and interest components are

provided in the offering announcement if not previously announced.

(b) Treasury fixed-principal securities--(1) Minimum par amounts

[[Page 35784]]

required for STRIPS. For a fixed-principal security to be stripped into

the components described above, the par amount of the security must be

in an amount that, based on its interest rate, will produce a

semiannual interest payment in a multiple of $1,000. Exhibit C to this

part provides the minimum par amounts required to strip a fixed-

principal security at various interest rates, as well as the

corresponding interest payments. Amounts greater than the minimum par

amount must be in multiples of that amount. The minimum par amount

required to strip a particular security will be provided in the press

release announcing the auction results.

(2) Principal components. Principal components stripped from fixed-

principal securities are maintained in accounts, and transferred, at

their par amount. The principal components have a CUSIP number that is

different from the CUSIP number of the fully-constituted (unstripped)

security.

(3) Interest components. Interest components stripped from fixed-

principal securities are maintained in accounts, and transferred, at

their original payment value, which is derived by applying the

semiannual interest rate to the par amount. When an interest component

is created, the interest payment date becomes the maturity date for the

component. All such components with the same maturity date have the

same CUSIP number, regardless of the underlying security from which the

interest payments were stripped. All interest components have CUSIP

numbers that are different from the CUSIP number of any fully-

constituted security and any principal component.

(c) Treasury inflation-indexed securities--(1) Minimum par amounts

required for STRIPS. The minimum par amount of an inflation-indexed

security that may be stripped into the components described in

paragraph (a) of this section is $1,000. Any par amount to be stripped

above $1,000 must be in a multiple of $1,000.

(2) Principal components. Principal components stripped from

inflation-indexed securities are maintained in accounts, and

transferred, at their par amount. At maturity, the holder will receive

the inflation-adjusted principal value or the par amount, whichever is

greater. (See Sec. 356.30.) The principal components have a CUSIP

number that is different from the CUSIP number of the fully-constituted

(unstripped) security.

(3) Interest components. Interest components stripped from

inflation-indexed securities are maintained in accounts, and

transferred, at their adjusted value, which is derived by multiplying

the semiannual interest rate by the par amount and then multiplying

this value by 100 divided by the Reference CPI of the original issue

date (or dated date, when the dated date is different from the original

issue date). See Appendix B, Section IV to this part, for an example of

how to calculate an adjusted value. The payment value of any interest

component created prior to March 31, 1999, will be converted to its

adjusted value. When an interest component is created, the interest

payment date becomes the maturity date for the component. All such

components with the same maturity date have the same CUSIP number,

regardless of the underlying security from which the interest payments

were stripped. The CUSIP number of any interest component created prior

to March 31, 1999, will be converted to the fungible CUSIP number for

the same maturity date. All interest components have CUSIP numbers that

are different from the CUSIP number of any fully-constituted security

and any principal component. At maturity, the payment to the holder

will be derived by multiplying the adjusted value of the interest

component by the Reference CPI of the maturity date, divided by 100.

See Appendix B, Section IV to this part, for an example of how to

calculate an actual payment amount from an adjusted value.

(4) Rebasing of the CPI. In the event that the CPI is rebased, the

adjusted values of all outstanding inflation-indexed interest

components will be converted to adjusted values based on the new base

reference period. At such time, Treasury will publish information

specifying the manner in which this conversion will be accomplished.

Subsequent to rebasing, any TINTS created from a security that was

issued during a prior base reference period will be issued with

adjusted values calculated using reference CPIs under the most-recent

base reference period.

(d) Reconstituting a security. Stripped interest and principal

components may be reconstituted, i.e., restored to their fully-

constituted form. A principal component and all related unmatured

interest components, in the appropriate minimum or multiple amounts or

adjusted values, must be submitted together for reconstitution.

Interest components stripped from inflation-indexed securities are

different from interest components stripped from fixed-principal

securities and, accordingly, are not interchangeable for reconstitution

purposes.

(e) Applicable regulations. Unless otherwise provided in this part,

notes and bonds stripped into their STRIPS components are governed by

Subparts A, B, and D of Part 357 of this chapter.

4. Appendix B to Part 356 is amended by revising the list of

section headings at the beginning of the Appendix to read as follows:

Appendix B to Part 356--Formulas and Tables

I. Computation of Interest on Treasury Bonds and Notes.

II. Formulas for Conversion of Fixed-Principal Security Yields to

Equivalent Prices.

III. Formulas for Conversion of Inflation-Indexed Security Yields to

Equivalent Prices.

IV. Computation of Adjusted Values and Payment Amounts for Stripped

Inflation-Indexed Interest Components.

V. Computation of Purchase Price, Discount Rate, and Investment Rate

(Coupon-Equivalent Yield) for Treasury Bills.

* * * * *

5. Appendix B to Part 356 is amended by redesignating Section IV as

Section V and adding a new Section IV to read as follows:

* * * * *

IV. Computation of Adjusted Values and Payment Amounts for Stripped

Inflation-Indexed Interest Components

Note: Valuing an interest component stripped from an inflation-

indexed security at its adjusted value enables this interest

component to be interchangeable (fungible) with other interest

components that have the same maturity date, regardless of the

underlying inflation-indexed security from which the interest

components were stripped. The adjusted value provides for

fungibility of these various interest components when buying,

selling, or transferring them, or when reconstituting an inflation-

indexed security.

Definitions

C=the regular annual interest rate, payable semiannually, e.g.,

.03625 (the decimal equivalent of a 3-5/8% interest rate)

Par=par amount of the security to be stripped

Ref CPIIssue Date=reference CPI for the original issue

date (or dated date, when the dated date is different from the

original issue date) of the underlying (unstripped) security

Ref CPIDate=reference CPI for the maturity date of the

interest component

AV=adjusted value of the interest component

PA=payment amount at maturity by Treasury

Formulas

AV=Par (C/2)(100/Ref CPIIssue Date) (rounded to 2

decimals with no intermediate rounding)

PA=AV (Ref CPIDate/100) (rounded to 2 decimals with no

intermediate rounding)

Example. A 10-year inflation-indexed note paying 3\1/2\%

interest is issued on January 15, 1999, with the second interest

payment on January 15, 2000. The Ref CPI on January 15, 1999 (Ref

CPIIssue Date) is 174.62783, and the Ref CPI on January

15, 2000 (Ref CPIDate) is

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179.86159. Calculate the adjusted value and the payment amount at

maturity of the interest component.

Definitions

C=.035

Par=$1,000,000

Ref CPIIssue Date=174.62783

Ref CPIDate=179.86159

Resolution

For a par amount of $1 million, the adjusted value of each

stripped interest component is $1,000,000 (.035/2)(100/174.62783),

or $10,021.31 (no intermediate rounding).

For an interest component maturing on January 15, 2000, the

payment amount is $10,021.31 (179.86159/100), or $18,024.49 (no

intermediate rounding).

* * * * *

6. Exhibit C to Part 356 is amended by revising the heading to read

as follows:

Exhibit C to Part 356--Minimum Par Amounts for Fixed-Principal STRIPS

* * * * *

Dated: June 26, 1998.

Donald V. Hammond,

Acting Fiscal Assistant Secretary.

[FR Doc. 98-17525 Filed 6-29-98; 8:45 am]

BILLING CODE 4810-39-P